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What Is a Smart Contract?

What Is a Smart Contract?

Do the terms ‘smart contract’ or ‘blockchain’ seem convoluted? Read this to get a handle on the basics.

8th November 2018

What is a smart contract?

Artificial intelligence has revolutionised the way the lawyers approach their work. It has led to the proliferation of legal tech start-ups capitalising on this new approach to legal practise. Here at LawPath, we use document automation technology to generate our easily customisable legal documents.

One particularly impactful innovation is the smart contract which promises to revolutionise the way parties’ contract, particularly in trust-less relationships.

What is a smart contract?

Contracts, at their most basic level, are a series of language and structure patterns. They are prime targets for AI technologies as their pattern-based nature renders them easy to translate into code.

A smart contract is a program designed to self-execute the terms of a contract by having the terms of the contract written into its code. The contract is executed when a triggering event occurs. The execution of the contract is contingent on rules such as ‘if X happens, then do Y’.

Basic Example: Many of us have scheduled bank transfers for fortnightly rent payments. The transfer operates on basic smart contract principles: if it is X of the month, send $Y to party Z. It is self-executing dependant on certain criteria being satisfied.

What technology underpins a smart contract?

Smart contracts use blockchain technology. Blockchain is a shared digital ledger that all participants in the network can access, verify and update. Stored within each ‘block’ is data storing the records of executed transactions. The blockchain is decentralised meaning that each transaction must be approved by all of the other participants in the network.

Blockchain technology allows smart contracts to be transparent and accountable as the transaction history stored in the ‘blocks’ cannot be removed or deleted.

What is the benefit of a smart contract?

The benefit of a smart contract is that it eliminates the need for a third party to regulate a transaction. This is particularly helpful in relationships where there is little to no trust between the parties.

Example: When an individual contributes to a Kickstarter campaign, there is an understanding with Kickstarter that if the goal is reached, the money will be sent to the campaign owner, or if the goal is not reached, the money will be refunded. This arrangement requires both the contributing party and the receiving party to trust that Kickstarter will abide by the terms of the arrangement. Smart contracts eliminate the need for a third party by coding the ‘if X, then Y’ into a self-executing contract.

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Conclusion

At first glance, smart contracts can be confusing to conceptualise and understand. However, once understood, they can generate significant value for your business. If you have having trouble understanding smart contracts, one of LawPath’s business lawyers can help by explaining how they would work in the context of your business.

Need more help? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents, obtaining a fixed-fee quote from Australia’s largest legal marketplace or to get answers to your legal questions.

Author
Ashlee Johnson

Ashlee is a legal intern working in the content team at Lawpath. She is interested in information technology law, and all things innovation. Ashlee is currently completing a Dual Degree of Law/Commerce at the University of New South Wales.