Smart Contracts vs. Traditional Contracts: Key Differences

A contract refers to an agreement that exists between two or more parties which contains certain terms for exchanging value between them. These agreements may be legally binding, depending on whether they are in oral form or in writing. In the digital realm, contracts serve an instrumental role as they influence how transactions and businesses take place. Contracts play an indispensable role in the blockchain domain. Undoubtedly, without a contract, it is impossible to think of transactions that take place within blockchain networks.

Contracts have undergone considerable changes with time. Previously, traditional contracts played a domineering role. However, the emergence of the concept of smart contracts has taken the digital world by storm. Before understanding smart contracts vs traditional contracts differences, you must understand what these contracts are exactly.

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What are Traditional Contracts?

Traditional contracts serve as legally binding documents between two or more parties. These contracts contain the terms and conditions relating to transactions or associations between them. The core components of a traditional contract are offer, intention, acceptance, and consideration. Some of the key characteristics of traditional contracts include:

  • Enforceability in the court of law

Traditional contracts are enforceable in a court of law. Since these contracts encompass thorough legal elements, the association between the parties is obligatory.

  • Simple dispute-handling ability

In the case of traditional contracts, handling disputes is relatively simple. Undoubtedly, the existence of dispute resolution systems assists in the resolution of conflicting situations.

  • Reliance on intermediaries

Intermediaries or third parties play a key role in traditional contracts. For instance, lawyers play a key role when it comes to drafting the terms and conditions of such contracts.

  • Confidentiality

Due to the involvement of third parties, the parties depend on them to ensure confidentiality. The contracts may contain confidentiality clauses to make sure that privacy exists for confidential information.

  • Low level of automation

The elements of automation are limited in traditional contracts. The involvement of manual processes and involvement is high in these kinds of contracts. Thus, it increases the possibility of error due to human involvement.

  • Possibility of tampering

Traditional contracts are prone to tampering, which acts as a major shortcoming. In such paper-based contracts, the possibility of forgery exists. Similarly, there is also a possibility that such contracts may get lost, thereby causing disputes between the parties.

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What are Smart Contracts?

Today, smart contracts are one of the most popular inventions in the blockchain universe. These contracts are self-executing programs that exist on blockchain networks. The chief considerations that exist in such contracts are consideration, subject, and capacity. Before diving into smart contracts vs traditional contracts, you need to get familiar with the features of smart contracts.

  • Self-executing contracts

Smart contracts are self-executing, which implies that they can automatically run after the fulfillment of specific conditions. This feature in smart contracts eliminates the reliance on human intervention or involvement.

  • High level of trust and transparency

One of the main highlights of smart contracts is the high transparency that they offer. The decentralized dimension of blockchain technology makes it transparent, thereby enhancing trust.

  • Immutability aspect

After the deployment of a smart contract, modification is not possible. Clearly, this feature makes it a tamper-proof contract. The immutability feature ensures that no manipulation of smart contracts takes place. In case any change is made, it will lead to an entirely different hash result.

  • High autonomy

In smart contracts, there is no involvement of any intermediaries. Due to this, the level of autonomy for the parties is high. The execution and maintenance of smart contracts take place by the nodes on the blockchain network. Thus, there is no unequal distribution of power between any parties.

  • Self-verifying nature

Smart contracts are self-verifiable contracts. The automated elements in these contracts ensure that the verification does not require any kind of manual involvement.

  • Backup of the contracts

As smart contracts exist within blockchain networks, there is no risk of losing them. Their backup remains in the network, which minimizes the possibility of loss or misplacement of the contracts.

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Difference between Smart Contracts and Traditional Contracts

Now that you are more familiar with smart and traditional contracts, it is time to explore their differences. By understanding the differences between the two, you can know how smart contracts are revolutionizing the blockchain universe. The chief differences between smart contracts and traditional contracts arise in terms of automation, transparency, speed, immutability, and cost.

smart contracts vs traditional contracts

  • Automation

Are you wondering – How smart contracts are different from traditional contracts? If so, you must note that a fundamental difference arises on the basis of autonomy. Smart contracts can be automatically executed. Obviously, this is possible due to their self-executing property. When specific conditions and terms are met, the execution of such contracts takes place naturally.

The automation aspect makes smart contracts highly efficient in comparison to traditional contracts. Moreover, it also eliminates the need to depend on an intermediary. The traditional contracts, as the name suggests, are conventional. Due to this, these contracts cannot be automatically executed.

They entirely rely on manual involvement. Hence, it takes more time to execute traditional contracts. The dependence on humans’ role in traditional contracts makes them time-consuming. In the blockchain setting, smart contracts are a perfect fit that facilitates a large number of transactions on the network.

  • Transparency

Another key aspect that you must take into consideration regarding traditional contracts vs. smart contracts revolves around transparency. Smart contracts are totally transparent types of contracts. Hence, all the parties are capable of viewing the terms of the contract at all times. It is one of the most critical features of these contracts. Furthermore, it boosts the level of trust for the parties when they get into such contracts.

However, the same thing cannot be said about the transparency of traditional contracts. Clearly, this is because the level of transparency is questionable. The manner in which the interpretation of these contracts takes place may give rise to questions. Thus, in the case of traditional contracts, there exists a possibility of disputes or disagreements.

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When parties get into contracts, one of the main things that they look for centers around speed. When it comes to smart contracts, the speed of implementing the contracts is high. As they are automated and there is no involvement of intermediaries, the speed is a great strength of smart contracts. Due to the high speed, it is possible to manage time efficiently for parties that engage in these contracts.

The speed in traditional contracts is significantly low in comparison to smart contracts. One of the main reasons for this is the involvement of intermediaries or third parties. Moreover, the lack of automation limits the speed at which the execution of these contracts takes place. Therefore, the low speed of traditional contracts makes them a time-consuming approach.

  • Immutability

A key smart contracts vs traditional contracts differences is related to their immutable nature. While smart contracts are immutable, traditional contracts are not immutable. Due to the immutable nature of smart contracts, the possibility of malicious actors to forge or tamper with the contract is low.

After the execution of a smart contract has taken place, it is not possible to make changes to it. It is a unique trait of smart contracts that strengthens its level of security. In the cyber domain, smart contracts are nothing less than a boon, especially for members of the blockchain community.

In the case of traditional contracts, there exists no immutability. This is due to the fact that it is possible to tamper with such contracts. As these contracts are paper-based, there is a chance that someone may make modifications or changes to them. Thus, such contracts increase the possibility of conflicts between parties.

Cost is an important aspect that has to be taken into consideration when parties form contracts. Smart contracts are highly cost-effective. Obviously, the cost-effectiveness is due to the quick execution capability as well as the absence of third parties. However, in the case of traditional contracts, the cost is higher than that of smart contracts.

The reliance on intermediaries automatically adds to the cost. The manual process increases the time that is taken to create and execute these kinds of contracts. Hence, the high cost of traditional contracts acts as a major shortcoming. Besides, it diminishes the profitability of the parties.

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Future of Smart Contracts

Smart contracts serve as highly valuable tools in the blockchain arena. The emergence of these contracts has made it possible for individuals to make the most of blockchain technology. On the basis of the core features and strengths of smart contracts, it is safe to say that they have a bright future ahead.

As the popularity of blockchain is expanding like never before, the future of smart contracts is highly optimistic. Smart contracts are ideal options when there is no need to obtain validation from any third party. In blockchain, smart contracts serve as indispensable tools that make transactions possible. Without smart contracts, it is impossible to imagine blockchain.

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Limitations of smart contracts

It is true that smart contracts are much superior to traditional contracts in diverse aspects. However, it is equally important to take into account the limitations of smart contracts. Just like every coin has two sides, smart contracts have both strengths as well as limitations. In order to understand the actual potential of smart contracts, you need to be aware of their shortcomings. The knowledge is of immense value for every blockchain enthusiast.

One of the main limitations of smart contracts is that these contracts are pseudonymous, which exist in the blockchain networks. The transactions in blockchain indeed use pseudonyms for parties. Although it may not be entirely anonymous, the parties do not have to share their legal identities.

This feature increases the risk of becoming the target of a malicious party within the blockchain network. Moreover, in case a disagreement arises between the parties, it is close to impossible to sort out the matter legally. Parties in smart contracts do not get to enjoy the legal protection that is available in traditional contracts.

Another limitation of smart contracts revolves around the possibility of coding errors. If you do not have top-notch knowledge of blockchain technology, there is a chance that you may make errors while developing smart contracts. Indeed, the complexity of smart contract coding may lead to errors and diminish the integrity of these contracts.

Moreover, the immutable nature of smart contracts makes them inflexible or rigid. In case you want to make any changes to the contract, there is no room to make any changes. To understand smart contracts vs traditional contracts difference comprehensively, you must take into account diverse attributes.

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Conclusion

Both smart contracts and traditional contracts exist in the contractual domain. In digital times, the emergence of smart contracts has been a blessing in the online blockchain community. An in-depth comparison has been made between smart and traditional contracts. Before getting into any contract, it is instrumental to know how smart contracts are different from traditional contracts. The insight can help you choose the right kind of contract that meets your exact needs and expectations.

A plethora of differences that exist between smart contracts and traditional contracts have been presented before you. The key differences exist in terms of automation, level of transparency, speed, immutability, and cost. The future of smart contracts seems to be full of promise and potential, as it is ideal in the digital world. It is essential for you to bear in mind the core strengths along with the limitations of smart contracts so that you can make the most of these contracts.

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