When was the last time you received a late payment or chased a bill? Did you wait for your monthly payment only to find that it was late yet again? You may relate to these headaches as an investor, employee, or customer. But the tension that affects each of these singular parties is usually caused by an immovable contributor: an underlying traditional contract.
Contracts affect the workforce of all organizations, and 26% of employees are involved in managing these agreements at some point, according to the World Trade and Contract Association. With such a wide-ranging effect on a company’s employees, these contracts should keep up with the rest of a company’s advancements. Unfortunately, Contracts are often left to human maintenance and execution by either party, which can lead to costly mistakes and oversights.
Blockchain-based smart contracts can renew business and stakeholder relationships, but like most major structural changes to a company, it’s important to get them right.
Work smarter, not harder
The current style of contracts is flawed and outdated, but organizations have done little to change it. Poor contract management often costs companies at least 9% of their bottom line, a constant drain on value that can even amount to a 40% loss, according to PwC. This revenue loss is due to incorrect data entry, unpaid bills, customer management issues, incorrect reporting, and discounting, all essentially caused by human error.
And the setbacks do not end there. Miscommunications and unfulfilled contractual terms can occur simply because one of the parties involved is not aware of predetermined agreements. This creates a whole series of complications, such as friction between companies and their employees or external partners, which are often left to legal experts. A contract should provide clarity and reliability, not raise issues that require even more time and energy to resolve.
Companies can proactively prevent these problems from arising by bringing their contracts up to date with the rest of their innovation. Smart contracts are stored on the blockchain and, unlike traditional contracts, are executed by blockchain programming and not by a person.. Therefore, smart contracts can enforce the terms of legal contracts automatically. This frees either party from remembering the agreement and deadlines, ensuring streamlined and time-bound executions.
Smart contracts not only mean that the contract itself is smarter, but that everyone involved works smarter too. Without the need to manage and meet terms, people can focus on their real jobs, making the workforce more efficient and productive. Employees, customers, vendors and other parties who receive a payroll do not have to go after a business for compensation. And people can trust an unbiased code rather than an employer or business partner who could easily forget something or not consider the interests of the other party.
What must be considered
The fact that smart contracts can execute agreements without human action can be extremely useful for companies. But something that seems too good to be true often is. Therefore, companies must safely use smart contracts to improve, and not replace, traditional ones.
As with any contract, when there are loopholes in the agreement, it can be exploited by either party. Loopholes or oversights in smart contracts, which exist in a public ledger, can be exploited by a bad external actor. And we’ve seen it before: NFT creator Micah Johnson lost $34 million after an anonymous user exploited the smart contract during the launch of his NFT collection. Although a loss of this magnitude is unlikely to occur among most employers and employees, other significant losses can be avoided if companies run smart contracts through a private blockchain.
Nevertheless, Smart contract worst-case scenarios teach a valuable lesson about the importance of thoroughness when creating a smart contract. Ideally, a software engineer and lawyer should work together to ensure that the basis of the contract is sound and that all necessary legal precautions have been taken.
By collaborating in the early stages of creating a smart contract, a lawyer can ensure that the predetermined terms are clear, precise, and agreed upon. Also, the lawyer can make sure that the traditional contract is properly and accurately translated into the smart contract code. The software engineer can then create the code to execute the terms, mitigating risk through extensive testing to catch even the smallest flaws.
Smart contracts can change the way companies handle legal agreements and execute payments, but they can also be a double-edged sword. It is worth spending some preliminary time researching the proper protocol, to mitigate any possible flaws, before implementing it. By doing so, companies can ensure they are modernizing the foundation of their relationships and working smarter in the process.
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The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Tudor Vrabie is a co-founder, CTO, and project coordinator for SeedOn. He also co-founded HungryBytes in 2018, following his work as chief technology officer and PHP developer at Grapefruit. Vrabie is a software engineer, web developer, and tech enthusiast who is applying his expertise to revolutionize the crowdfunding process.
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