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What is the Difference Between Smart Contract And Traditional Contracts

What Are Smart Contracts? Let’s Understand with an Example: Major Benefits of The Smart Contracts? Smart contract vs smart legal contract

Written by Niel Patel · 7 min read >
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As blockchain technology is gaining popularity, more entrepreneurs, freelancers, and small business organizations are becoming interested in smart contracts.

But, legal contracts have been there for a long time as a bond between peers, whether it be business and client or business and business.

But now, thanks to the blockchain, such organizations have a more secure and fast way to get on the legal terms, known as smart contracts. Not only do smart contracts speed up the legal procedure, but also strengthen copyright and security.

Here, in this guide, you will know all about smart contracts vs traditional contracts. You will know in depth what they are. What is the major difference between these contracts, and how do they employ each?

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What Are Smart Contracts? Let’s Understand with an Example:

You can understand smart contracts as computer programs enabling an agreement’s digital validation, control, or execution. This agreement defines all the conditions on which the trade will happen.

Smart contracts function on the blockchain, which processes all transactions under a contract. No middlemen, therefore, are necessary for transaction execution. Smart contracts, like regular contracts, specify rules and penalties for an agreement but automatically enforce those responsibilities.

While they can function individually, many smart contracts can also be employed in tandem. Objects make an essential component of a smart contract. As you know, a Smart contract has three main objects included:

  • The parties participating in the smart contracts employ digital signatures to approve or reject the contractual terms.
  • The subject of agreement or contract.
  • Precise conditions of a trade or transaction.

Major Benefits of The Smart Contracts

Smart contracts live on the public database, making the contract execution easy.

Blockchain ensures the full security of the smart contracts– no unauthorized user can access the smart contract, even though smart contracts have been stored in the public database.

Smart contracts also make an efficient, cost-effective, and secure method of executing and administering contracts when compared to traditional contracts.

These are some of the benefits of smart contracts. However, there are many. With benefits, you can also find some concerns associated with these contracts. For example, smart contracts can also include the technical complexity of making updates and the inability to manage complex transactions.

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Example Of Smart Contract

This example will help you better understand smart contracts and how and when they work.

Let’s say a buyer agrees to pay a seller in exchange for the delivery of goods on a specific date. The contract specifies these things:

  • What amount do sellers have to pay?
  • What products will be delivered?
  • When will it be delivered? ………………. So on.

If any side fails to meet its responsibilities, the blockchain will retain and record the transaction.

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What are the Traditional Legal contracts? And How Are They Different From Smart Contracts?

Unlike smart contracts who work on the blockchain, a legal contract works on the state’s or business’s law.

A traditional contract is essentially a bundle of legally binding promises. In most cases, one party promises to do something such as selling an item to another in exchange for a benefit. Traditional contracts can be written or verbal, with one side making a request and the other agreeing. And if any legal conditional written in the contract is not met by the party, the other party can seek legal action.

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Smart Contract vs Traditional Contract: How are they different?

After reading the introduction to smart contracts and legal contracts, you probably understand that there is a huge difference in both of these contracts.

A smart contract is a computer program. Developers program it to act in response to the occurrence of a trade or transaction. A smart legal contract works as a legally binding agreement that is digital and capable of connecting its terms and achieving its obligations to data and software systems.

Legal contracts often come under a country or state’s law and on violating the condition written in the contract, the violator can be punished under the law. On the other hand, smart contracts may or may not come under the legal binding of the law.

Developers form smart contracts on blockchain technology. They create these smart contracts using the standard software and then deploy them on the blockchain. In contrast, one or more attorneys participate in creating the set of rules in the legal contract.

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Smart Contracts vs Traditional Contracts: Use Cases

To comprehend the difference between both contracts, let’s understand the use cases of both by one.

Use Cases: Smart Contracts

Smart contracts provide applications in various industries, including healthcare, supply chain, and financial services. Here are a few examples:

Healthcare System:

The one infrastructure that is looking forward to smart contracts is the Healthcare System. Using a private key, blockchain can store patients’ encoded health records. Due to privacy issues, only particular individuals can access the documents. Similarly, smart contracts can also function to conduct research securely and secretly.

Healthcare experts can record all the patient’s data on the blockchain, which will stay in the records as proof of service with insurance providers. Furthermore, the public ledger can make a variety of tasks easy, including supply management, drug supervision, and regulatory compliance, with the help of smart contracts.

Finance Industry

Smart contracts can also contribute to the transformation of the core traditional financial services in a variety of ways. In the case of insurance claims, they verify for errors, route them, and then send compensation to the user if everything checks up.

Smart contracts also allow shareholders to participate in decision-making transparently. They include essential bookkeeping capabilities and eliminate the potential of accounting record intrusion. They also aid in trade clearing, when payments are transmitted once trade settlement amounts have been calculated.

Supply Chain

Traditionally, if you look at retail history, the supply chains have suffered due to paper-based systems. First of all, it was time-consuming as you have to take the forms through several channels before the approval. Further, this time-consuming process has other downfalls like the possibility of fraud and loss.

Blockchain can eliminate such risks by providing those involved in the chain with an accessible & secure digital version. Not only that, but you can also use smart contracts for inventory management and payment and task automation. So, smart contracts can undoubtedly eliminate the risk that is core to the traditional supply chain, but also provide other benefits like time-saving. 

Payment Across The Borders

Smart contracts can undoubtedly address legal issues and provide a better approach to resolving conflicts between parties if properly integrated.

These contracts hold the potential to change trade finance. Undoubtedly, utilizing a Letter of Credit can aid in international commodities transfer & trade payment start.

Adopting smart contracts will boost the liquidity of financial assets, therefore boosting the financial efficiency of suppliers, purchasers, and institutions. In making smart contracts function in trade finance, particularly in cross-border payments & international trade, an industry standard must be identified and implemented.

Insurance

If you want to know what are the most common applications for smart contracts, it is in the insurance industry. The majority of conflicts occur in the insurance industry. As an example, consider automobile insurance. Smart contracts can cover the insurance as quickly as possible.

Smart contracts can use a wide range of technology, including the IoT. With the help of technology, the smart contract will simplify the policy and ensure that it has all of the necessary data, including driver reports & driving records. If you successfully configure the smart contract with the appropriate policies, forums, and data collection methods, it can execute itself immediately after the accident. 

Automobile Industry

Smart contracts can ease many elements of driving and owning a vehicle in the automotive industry. These contracts can automate payment for vehicle-related tasks like maintenance, toll road driving, and insurance. Smart contracts, for example, enable car insurance payments based on usage rather than fixed prices. 

Smart contracts in insurance
Smart contracts in insurance

Research

Smart Contracts can help to improve the research process, especially clinical research. Because of the automation & privacy-preserving computations, it can perform and automate data transfer between organizations. This is one of the most powerful use cases of smart contracts; experts are looking forward to it. 

Furthermore, smart contracts can automate trials and communicate information across industries. More specifically, it can aid data identity, authorization, and authentication. 

Use Cases of Legal Contract-How They Work

When understanding smart contract vs smart legal contract battle, you need to understand what are the uses of legal contracts. 

Unlike smart contracts, legal contracts act as binding agreements between two or more parties that govern what individuals can and cannot do. Legal contracts are mostly formed under the law, not technology. Yes, there can be their digital version, but these legal agreements are mostly drafted, and promises are made between both legally binding parties.

Legal contracts are beneficial since they protect both parties in the event of a legal dispute. They also establish expectations so that anybody who signs the contract knows their rights and duties.

KeyTakeAways- Smart Contract vs Smart Legal Contract

  • Smart contracts and legal contracts have major differences based on the employment of the contract. While smart contracts are technical identities, legal contracts are legal identities. 
  • Developers create smart contracts according to the conditions and agreements of parties involved in them. On the other hand, lawyers or legal attorneys participate in the legal process to create legal contracts. 
  • Legal contracts have been here since the law was introduced to the world. Smart contracts became popular just a decade ago. 
  • Smart contracts are not a direct alternative to legal contracts or vice versa. 

Smart Contracts Vs Legal Contracts

If you want to know more about smart contracts, here are some benefits of these contracts. 

Cost Effective 

Smart contracts do not require brokers or other middlemen to confirm the agreement, eliminating the possibility of third-party manipulation. This results in a more time-saving process and is subsequently cost-effective. While legal contracts can cost you much more than you can expect. They have a whole lengthy process involved. The time-consuming process of making legal contracts can be even more complex.  

Backup

Blockchain duplicates all of its documents many times, allowing the original to store itself multiple times. So, if one copy of the smart contract goes down, the other will play its part. 

On the other hand, legal contracts do not have much strong backup. Losing the legal contracts means having to go through the entire lengthy process to create the legal contracts. 

Secure 

Smart contracts are much more secure than legal contracts. No one can alter the data included in the smart contract. While unauthorized identities can manipulate legal contracts according to the benefits of one party.

Smart contracts limit the chances of any fraud and cybercrime. On the other hand, legal contacts do not have that much security towards fraud prevention.

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Employment Speed 

Employment of smart contracts is much easier than legal contracts. Developers can make smart contracts in hours, if not then days. But legal contracts can take weeks and even months. 

Accuracy

Smart contracts eliminate the errors that occur due to the manual filling of the legal contracts. Smart contracts can provide you with higher accuracy in trading.

Wrapping Up!

This is all about smart contracts vs traditional contracts. Both of these contract types have different benefits and some limitations too. While smart contracts can provide accuracy, security, speed, backups, and transparency, legal contracts may lag a bit behind in these attributes.

Legal contracts also provide you with security, but they have much more vulnerable factors towards fraud than smart contracts do.  

However, no contract is an exact alternative to each other for the present, so the future holds the key. But no doubt smart contracts have unlimited possibilities and tech experts are discovering the different opportunities around them. 

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