Smart Contracts Advantages and Disadvantages

“A smart contract is a computer program that directly controls some kind of digital asset... The smart contract approach says instead of a legal contract, immediately transfer the digital asset into a program, the program automatically will run code, validate a condition, and determine whether the asset should go to one person or back to the other person, or whether it should be immediately refunded to the person who sent it or some combination thereof. ” Vitalik Buterin, Founder of Ethereum

Smart contracts have several advantages including:

1. Lower error rate. Instead of trusting humans, smart contracts allow the trust to be shifted to mathematics, which should reduce errors stemming from malicious or negligent human management.
2. Automatic implementation of new data and secure storage of historical data.
3. The transparency and auditability of smart contracts also increase the personal responsibility of the humans that manage the smart contract because each transaction with the contract is recorded along with the account that initiated the transaction.
4. By using a smart contract, the parties commit themselves to the rules of the underlying code. In theory, this should reduce the potential for dispute and arbitration costs, as both parties agree to the outcome programmed into the smart contract.

Disadvantages include:

1. Legality of smart contracts is questionable. Since this structure is digital, it can circumvent state licensing requirements. State courts do not have to recognize the rights of investors.
2. Smart contracts are not very flexible. Once a smart contract has been executed on a public blockchain, the contract is vulnerable to hackers. Fixing errors and changing contract terms can be impossible.