Smart contracts are one of the cornerstones for blockchain and web3

Sachin Latawa

August 23, 2022

Table of Contents

# Are smart contracts legally enforceable?

# What do smart contracts bring to the (virtual) table?

# What are the challenges for wider application?

# Some examples of the real world applications

# Looking forward: smart contracts and real estate, made for each other?

Companies and governments around the world are implementing or experimenting with Smart contracts. The technology has the potential to disrupt traditional business models across different industries.

What are smart contracts and how do they work?

At their simplest, smart contracts are self-executing contracts with the terms of the agreement encoded into the contract itself.

The technology, or the "code," for smart contracts is stored, verified, and executed on a blockchain network and works by following "if/when... then" statements. These could include executing a simple workflow or a complex set of transactions when certain predetermined conditions are met and verified.

Implementing smart contracts can eliminate the need for a third party to facilitate, verify or enforce the performance of a contract. They can also automate a workflow, triggering the next set of actions when certain conditions are met.

But there's much more to it than that. Smart contracts can be used to encode all sorts of data and processes spanning a variety of industries, including supply chains, banking, trading, real estate, insurance claims, and even voting procedures. They have the potential to revolutionize how we do business online and could even help us build a fairer and more trusting society.

# legally enforceable?

If you are reading this post, we certainly know that you are smart (much smarter than the smart contract), so you should not consider this legal advice.

Smart contracts have already been used in multiple use cases and are enforceable in the US as long as they follow the basic rules of contractual agreements. As with any agreement, there must be an offer, acceptance of that offer, and consideration.However, the enforcement of smart contracts will likely differ from traditional contract law in some respects. For example, because blockchain-based smart contracts are self-executing, there may be less scope for judicial interpretation of their terms. Nevertheless, as blockchain technology becomes more widely accepted, the legal framework for smart contracts will likely continue to develop.

# what do smart contracts bring to the (virtual) table?

1. speed, efficiency and accuracy: Smart contracts use software code to automate processes, shortening the time it takes to move through all processes requiring human interaction. The execution is immediate after a condition is satisfied. Smart contracts can automate a wide set of tasks and transactions, which not only makes them faster but less susceptible to manual errors.

2. fewer intermediaries and reduced costs: Smart contracts reduce the need for multiple intermediaries at various transaction stages that provide "trust" services. It can eliminate the need to validate and generate a paper trail for verification, confirmations, and reconciliations as the process is automated within the smart contract.

3. increased security and lower execution risk: Smart contracts are incredible in part because of their security. They cannot be changed or altered in any way without detection because they operate on networks with immutable data. The execution of smart contracts is managed automatically by the network rather than an individual party which can virtually eliminate the risk of errors, nonperformance, or manipulation at various stages of the transaction.

4. trust and transparency: Smart contracts allow multiple parties that do not know or trust each other to maintain consensus regarding the transaction status and the updates made to a shared ledger. Transactions are visible to all transacting parties increasing their auditability and trust.

# challenges for wider application

1. Confidentiality: Transacting parties want transparency in any business interaction, but they could also be wary about putting potentially strategic or confidential information on the blockchain. Permission-driven blockchain platforms like Hyperledger provide a solution.Hyperledger (a product of the Linux Foundation) makes the information visible only to transacting parties to the contract and not to the general public. Ethereum, the most widely used platform for smart contracts, on the other hand, does not have an option for private smart contracts. Therefore, companies will have to carefully consider their requirements before settling on a blockchain solution to build smart contracts.

2. Error-prone inputs: anyone who has dealt with technology has probably heard the term garbage in, garbage out, smart contracts are not immune to the input and coding errors.

3. Interoperability: As with early-stage technology, many organizations are evaluating and experimenting with building smart contracts on various blockchains. Interoperability between these platforms would be something to watch.

4. Lack of understanding: Not to say the traditional contracts are easy for consumers to understand. (how many people do you know who have read and understood their entire mortgage agreement?), smart contracts have a steep curve to establish trust in the marketplace, and uneasiness among early adopters is expected.

# real world applications

Some of the early applications where we see smart contracts being deployed are:

  • Purchase and sales of assets
  • Mortgage origination
  • Title insurance
  • Escrow services
  • Verification of financial assets
  • Notary services

Real Estate use cases in action:

1. Propy is using smart contracts to make buying and selling homes easier.

2. Tirios uses smart contracts to offer fractionalized real estate investment opportunities in the Single-Family Rental sector.

3. Figure is using blockchain and smart contracts for mortgage loan originations.

4. Some of the other use cases we see in the near future relate to Escrow services and Title insurance applications where the authentication, validation, and verification can be completed using smart contracts. There are a few promising start-ups in this space that we are tracking, and will send updates as they are launched.

# looking forward: smart contracts and real estate, made for each other?

If you are getting an overwhelming feeling of what seems a no-brainer for using smart contracts and blockchain for real estate use cases, you are not alone. Smart contracts' potential to offer increased speed, transparency, streamlined processes, and better security can significantly reduce transaction costs, add efficiency and build trust between the transacting parties in real estate transactions.Smart contracts are a new and exciting technology that has the potential to revolutionize the real estate industry. They offer several advantages over traditional contract methods. Still, as with any technology, the development (or the lack thereof) of actual applications is the key to tipping the technology towards mass adoption or can turn it into a "good to have niche."


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