Smart Contracts for the layman: Pros and cons of the new way of building relationships

By this time, you may have heard a thing or two about smart contracts. This topic is broadly discussed across the board. Some put obsessive hopes on it, while others are pretty skeptical. From this perspective, the majority still haven’t formed their own opinion, but only collected the viewpoints of both sides. Therefore, there’s a situation, when regular people find it really hard to see the whole picture of what’s it all about. In this article, we do not take one or another position, but just give reader an objective view of the concept of Smart Contracts. So, here’s the plan. First of all, we’ll consider the difference between smart contract and the traditional one and then turn to the subject of pros and cons of both of them.

What is a traditional contract?

It is simply a notarized piece of paper that details actions that are to be performed under certain conditions. Let’s assume there’s a group of individuals who would like to establish rules of how and under which conditions certain values are to be allocated. They need guarantees. That’s why they will constitute a contract. This paper doesn’t control the actions fulfillment, but only assures it. In case something is done against the contract terms, there’s a court — trusted face of justice, that will work things out if you show enough evidence of lawless actions.

The idea of a programmable contract

A Smart contract is a programmable contract, ordinarily, executed in a decentralized environment. Just like the paper contract, it specifies the conditions. Along with that, since smart contract is basically the program code, it carries out actions (which is impossible when we deal with the paper one). 

Undoubtedly, the concept of smart contracts is the next step in relationships between people, companies, etc and their values. Because, now you not only assure conditions under which you are obliged to do certain actions but initially determine actions that will definitely be done by the program, in case these conditions met. 

Smart Contracts vs Traditional Contracts


You may be surprised, but this can definitely be called an issue when we speak of traditional contracts. Their language is complicated. You may think: “Not as difficult as the programming one.” It’s true, but we’re considering it from a bit different angle. We’re speaking about the approach in general… In order to draw up a contract, you need a lawyer, who will very accurately specify the conditions. Even if he did it in a supremely correct way, in case of some legal proceedings the chances of winning a court case (even if the truth is on your side) commonly relies upon the lawyer’s professionalism. Which in itself proves that the way traditional contracts are constituted can very often be unclear. 

Smart Contracts are programmable. In this way, you no longer need a lawyer, but a developer. So, is it good or bad? As to the complexity, the program code is much less understandable for the regular person than the juridical. However, you have less uncertainty when you deal with the program code. In addition to that, before putting a smart contract into action it is being intensely tested. You cannot test a paper contract, but only draw it up and hope that your lawyer is professional enough. Of course, there is no way around bugs, so the professionalism of developers who work out your smart contract is of equal importance with that of lawyers who deal with the paper contract. So, there’s no black and white here.

Smart contracts do not have a Plan B

Let us recall that smart contracts are typically executed in a decentralized environment, where anyone can become a validator and verify the authenticity of correct smart contract execution and the state of the database. Distributed and independent validators supremely minimize the third-party reliance and give confidence concerning unchangeability of what is to be done. This is good and bad at the same time:

  • Good. Imagine a rental agreement on a Smart Contract. There’s only the landlord, tenant and a Smart Contract that fulfills the required actions. The fact that program code is unchangeable removes the stress of both: tenant and landlord. The parameter of trust is eliminated, because human factor is almost nullified.

  • Bad. You cannot change a thing once smart contact is put into action. That’s why a bug can bring to some very unfortunate consequences. Like, for example, loss of $160 million. 

Traditional contracts have a Plan B

Do you remember we spoke about a trusted face of justice? The Law Court is our Plan B. We got used to it. All of us have Plan Bs: victims who try to win a payout, unemployed trying to increase their income support and even murderers who wish to get away with it. In our society, the court is center of decision-making. And, again, it is good and bad at the same time:

  • Good. In any situation, it aims to resolve the problem in favour of the side, which is more right according to the jurisdiction. When our relationships are deadlocked, due to any kinds of reasons, the court is probably the only solution approach.

  • Bad. The stumbling stone is a human factor. Being the ultimate decision center, the court becomes a pressure point for our relationships. And it’s not really about the loopholes in the law, but namely — bribery.

Fundamental challenges with Smart Contracts

If we think about a bottom-up structure of the main challenges with implementing Smart Contracts in our everyday life, it would be something like this:

  • Decentralization

  • A completely new way of how relationships are built

  • Hardships of accepting the ‘new rules’ by the people

  • Not applicable to the current legal base

  • The necessity of introducing substantially new legal environment

As you can see, the main issue with Smart Contracts is not the development of the program code, but the creation of the proper groundwork, which would let them realize their full potential. The backbone of traditional contracts has been constantly growing stronger for thousands of years. In this long path, people learned to co-exist and operate under a regulatory system, elaborate laws, build strong business relationships and so on. Now, we’re at the very beginning of the new path, where we’ll learn to build much stronger relationships that do not rely on third-parties and trust. This is truly a breaking point, significance of which is probably higher than that of the railroad revolution in America.

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