Smart Contract – what is it and what are its limitations?

For many people the idea of Smart Contracts (literally smart contracts) is completely foreign, they may even think that they are completely useless to the average person. Nothing more mistaken, Smart contracts can be used by each of us also on a daily basis. What are they and what are they really used for? We will try to answer these questions in this article.

What are Smart contracts? 

Smart contracts are nothing else than programs created mostly based on the network and the Ethereum (ETH) blockchain, the second largest cryptocurrency after Bitcoin. Of course, compared to games or applications, these are extremely simplified programs whose formulas can be compared to conditional commands like – “If event X occurs, execute command Y”. Thus, we can describe a smart contract as a simple conditional contract.

Importantly, a record on a blockchain is relatively secure due to its immutability and record permanence. The blockchain itself is a ‘stack’ of information in which each portion of information is stored on a separate block, and it is a decentralized database of information while preventing unwanted access by a third party. It is important that Smart Contracts and each of their records can be verified at any time by both of its parties, so there is no question of any changes or edits to the already saved and implemented Smart Contract, which in turn excludes any irregularities in the content of the contract.

What are the limitations of Smart Contracts? 

Of course, Smart Contracts have their limitations. It will be impossible, for example, to describe on a Smart contract complicated concepts that require additional interpretation. At this moment, therefore, there is no possibility to replace 100% classic contracts with Smart Contracts. However, they can complement them by automating processes related to, for example, payments. It is easy to imagine a Smart contract that handles payment for the use of someone else’s copyrights (for example, for a musical work).

Smart contract security

A big problem (and at the same time, from the security side, also an advantage) of Smart contracts is the lack of possibility to edit their content after saving them on the blockchain. Therefore, the possible edition of the code itself or making corrections of errors, may prove to be impossible. Also from the perspective of personal data protection law, in particular the right to be forgotten, a smart contract may prove to be problematic. Another important issue is the regulatory void – at this point there are virtually no legal standards to navigate a rather complex and novel technology.

We believe that one day Smart contracts will be part of our everyday lives. However, before this happens there are many challenges and problems that need to be solved.