Smart Contracts Use Code To Enforce Terms

Smart contracts may transform the way contracts are formed and enforced across many industries. Traditionally, a contract is an agreement with legal terms and promises by the parties. Parties to a traditional contract typically enforce their agreement through a third-party, such as a mediator, arbitrator, or a judge. Similar to a traditional contract, a smart “legal” contract contains the promises of the parties, but the terms are written in a computer programming language, such as Java, C++, or Python.

Ethereum smart contract (click to zoom)

Smart contracts are based on logic, so precision in coding is extremely important. The computer code enforces the smart contract through a distributed ledger system that is based on blockchain.

Blockchain contains “blocks” of validated transactions. The transactions are validated with asymmetric encryption where the parties utilize a public and private key. The synchronized transactions of a smart contract create a finalized digital ledger that can be distributed for value.

Benefits of Blockchain

The main benefit of blockchain is trust. Blockchain allows parties to conduct transparent transactions without relying on a third party. The self-executing computer code eliminates the need for an intermediary.

As another benefit, computer code does not consider external evidence, so the parol evidence problem is nearly eliminated with smart contracts. As long as the code is accurate, the smart contract becomes evidence of the intention and performance of the parties.

Smart contracts have a wide variety of uses across many industries. For example, in the insurance industry, a code-friendly “if-then” relationship applies to many basic insurance policies. In a typical life insurance policy using a smart contract, Blockchain would record the terms. When the policyholder dies, the code would initiate the payment to the beneficiary. As a result, the smart contract is self-executed without needing approval from an administrator.

To learn more about smart contracts, view this article:

Smart After All: Blockchain, Smart Contracts, Parametric Insurance, and Smart Energy Grids

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Alice is a member of the Florida Bar, and she focuses on data privacy and cybersecurity compliance in her law practice. She attended the Warrington College of Business at the University of Florida and earned a Bachelor of Science in Business Administration. After graduating, she earned a Juris Doctor at the Stetson University College of Law. During law school, she served as an Assistant Executive Editor for Stetson Law Review and also as a Staff Editor for Stetson Journal of Advocacy and the Law. She currently serves as Chair of The Florida Bar Journal/News Editorial Board.