Legal contracts printed on sheets of paper and bundled as a booklet are commonplace. Whether we are buying a piece of land or opening a bank account, we sign legal contracts that bind all parties involved in the transaction. They hold them accountable to the law and require them to do their due diligence without fail.


If we take these contracts, convert them into lines of computer codes, and put them on a blockchain network such that they can self-execute, we get smart contracts. Smart contracts are fully automatic contracts on a blockchain that ensure all parties involved in a transaction abide by their part of the contract without the need for a middleman. 


Blockchain-based smart contracts offer increased trust, more security, faster execution time, increased accuracy, and many other benefits across various sectors from payments to real estate and far beyond.


However, smart contracts face their own challenges and shortcomings. Let’s dive in.

  • Dependence on outside data

Smart contracts are based on the blockchain. And blockchains are digital systems that cannot interact with the outside world data on their own. Thus, they depend on third-party services called oracles that convert outside world information into data that smart contracts can understand.


The dependence of a decentralised system on a centralised third-party application raises concerns about the security and authenticity of the system. The companies operating the oracles may, if they want to, alter the real-world data they feed to the smart contract and tamper with the results they produce.


The most viable solution to the problem is a blockchain-integrated oracle such as the Alacirty’s Integrated Oracle. It takes inputs from not one party but multiple blockchain nodes before transmitting the information to the smart contracts — similar to how blockchain networks approve transactions.


  • Immutability of Code

Smart contracts once deployed cannot be tampered with. The codes they contain cannot be altered to suit any other directive. This makes developing fool-proof smart contracts a challenging task. It demands perfection from developers. 


Even the slightest of flaws in smart contract codes can compromise the whole contract and allow hackers to exploit it to their benefit.


To mitigate the risks of a faulty smart contract, experts often suggest proper audits of the contract before deployment. Developers also sometimes resort to de-facto mutability, wherein they store parts of the codes in separate contracts and store the address of the preferred contract that needs to be called in a modifiable storage system.

  • Difficulty coding complex terms and conditions

As we said, coding smart contracts is not as simple. There are many variables to keep in mind especially when we deal with more complex terms and conditions than involved in simple payment transfers. For example, there can be numerous types of disputes that may arise in the sale of a house. And to encode each such situation into a smart contract can be onerous.


Hence, it will be too early and a bit of a stretch to think that we are ready to replace all forms of legal contracts with smart contracts.

So, are smart contracts worth the time?

Of course, yes. No technology comes without a drawback. But it evolves over time as more innovation happens and better solutions are built to tackle those challenges. Smart contracts surely have their limitations but they also present immense possibilities, especially in the world of decentralised finance. While they are not the perfect solution for all legal contracts we use today, they have the potential to eventually become mainstream in a more digitised world.