Smart Contracts: Mechanism and Application in Businesses

Smart contracts offer significant potential for automating and enhancing business efficiency. However, to optimize their application and minimize risks, collaboration between technology developers, businesses, and legislators is crucial to establish an appropriate legal framework. Additionally, raising awareness and skills related to the technology among stakeholders is essential.

Definition and Operation Mechanism

Smart contracts are self-executing programs on blockchain platforms that operate when predefined conditions are met, without the need for third-party oversight. Unlike traditional contracts that rely on human enforcement or courts, smart contracts operate automatically, transparently, and are immutable once deployed.

Operation Mechanism:

• Encoding Contract Terms: The terms of the contract are written as code.

• Condition-Based Execution: When a condition is met (e.g., full payment received), the contract automatically performs the corresponding action (e.g., transferring assets).

• Transparency and Decentralization: Contract information is stored on the blockchain, ensuring it cannot be altered or tampered with. For example, in a purchase transaction, a smart contract can be programmed to transfer asset ownership as soon as the buyer completes payment.

Advantages and Limitations

Advantages:

• Automation: Minimizes human intervention, reducing errors and costs.

• Transparency: Data on the blockchain is public and immutable.

• Enhanced Security: Blockchain employs strong encryption to protect information.

Limitations:

• Code Dependency: Errors in the code can lead to asset loss or legal disputes.

• Difficult to Amend: Once deployed, modifying a smart contract is complex and costly.

• Legal Challenges: Many jurisdictions lack comprehensive legal frameworks to recognize or resolve disputes related to smart contracts.

Applications in Businesses

Smart contracts are being used across various sectors, offering exceptional efficiency for businesses:

• Supply Chain: Tracks and automatically confirms goods delivery, reducing fraud and improving reliability.

• Finance and Insurance: Automates loans and insurance payouts upon predefined events.

• Real Estate: Simplifies transactions and transfers of property ownership through self-executing contracts.

• Intellectual Property Management: Automates usage rights and royalty payments for creators.

Legal Challenges

Currently, many countries, including Vietnam, lack specific regulations for smart contracts. Key issues that need clarification include:

• Legal Recognition: Can smart contracts be deemed legally binding under civil law?

• Dispute Resolution Jurisdiction: Should disputes be resolved by traditional courts or specialized bodies?

• Accountability: Who is responsible if the contract code contains errors or is exploited?

Author: Dang Uyen Thy - Legal  Department

Date: 19.01.2025