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As Mark E. Forster, Chairman of IAB Metaverse and Adello founder, during the panel discussion about the metaverse from the law perspective, mentioned:
“The legal frames follow the technical possibilities with a delay of a couple of years.”
Indeed, Web3, in general, is an absolutely new field that was almost untouched by government law. Nevertheless, contentious issues and unfair situations already take place in the Web3 world. For instance, one of our Adello Magazine authors, Lavinia D. Osbourne, took her law case to the High Court and managed to secure an injunction to freeze the NFTs that were taken from her wallet. In fact, in the Internet era, where users can officially own things, juridical regulations are essential.
Despite the fact that the law system for Web3 was not designed yet and regulated by the government fully, there are some juristic elements that help to protect users. One of them is smart contracts.
A smart contract is an agreement between two or more parties to establish, change or terminate legal rights and obligations. Part or all of the terms of a smart contract are written, executed, and/or enforced automatically by a computer algorithm in specialized software.
The use of digital agreements reduces financial, administrative, and time costs, as well as the likelihood of legal errors. Smart contracts involve the resources of the entire network rather than a separate segment of it. Introducing smart contracts into business turnover will increase the speed of business processes. Also, the use of smart contracts in traditional processes has the potential to create a more convenient environment for interaction between government, organizations, and citizens.
Traditional contracts are often so complex that they require third parties to enforce them. That is why there are lawyers who work on drafting and adjusting smart contracts for specific cases.
An important aspect of smart contracts is decentralization. The blockchain system processes direct debit transactions in which the recipient, not the sender, initiates the payment. Decentralized blockchain platform supporting thousands of transactions per second, the processing of which is cheap and does not require huge energy costs. This facilitates messaging and makes the process transparent. Moreover, decentralized management reduces the risk of manipulation and fraud by criminals.
Smart contracts are made between two or more parties or legal entities formalized not on paper but in the form of an algorithm.
In global practice, smart contracts are used not only in the financial market, including banking and insurance but also in public administration, retail, healthcare, initial public offering, and others. Smart contracts allow the tokenization of everything, including ownership rights to real-world assets and intellectual property. Generally, these tokens can be split into 2 groups: non-fungible tokens, also known as NFTs, and fungible ones.
This gives smart contracts vast potential. It is expected that in the near future, smart contracts can be more popular as more private and public organizations adopt them. This can be explained by the growing confidence in blockchain technology and the widespread use of Web3, as well as the rise of controversial cases related to ownership on the internet (including intellectual property).
The global economy is on the verge of a new digital revolution, which will lead to a mass usage of smart contracts in many different areas. The introduction of new technologies will result in a global acceleration of transactions and business processes. Smart contracts can completely change all spheres of the national economy. The world economy will become more flexible, transparent, and personalized.
With a smartphone, the user will be able to sign a contract with any business or person, no matter where they are located. Computer algorithms will help eliminate bureaucratic hurdles and create new incentives for business development. According to The Economist, smart contracts have the prospect of becoming the most important application of blockchain technology.
The application of smart contract tools gives impetus to the emergence of new business models, which impacts increasing competition and the development of new services in the financial market.
Smart contracts can become legally significant if they comply with the laws of the state. For this purpose, smart contracts must contain conditions and restrictions established by the legislation of the country.
Smart contracts bring opportunities as well as risks. Blockchain technology could render hundreds of professions redundant, leading to a dramatic increase in unemployment on a global scale. The complete digitization of documents will lead to the emergence of hacker groups that specialize in hacking distributed databases. In the event of a successful attack, cybercriminals could gain access to vast amounts of information that would be used to steal money.
Currently, smart contracts are still far from perfect. The blockchain infrastructure is still in development, and the code has critical bugs. In addition, there are many gaps in the regulatory framework for smart contracts, and Oracle programs still need to be developed. This makes it harder for organizations and individuals to use smart contracts in their everyday work.
Also, sometimes lawyers and programmers need help understanding each other. This communication gap prevents law professionals from controlling the correctness of will or deal expression.
Another issue is decentralization. Decentralization, as we mentioned, is an important aspect of smart contracts. Decentralization itself suggests that a community of users establishes the rules. If the state governs this, the principle of decentralization is put into question.
On top of that, smart contracts are not functionally flexible. When using traditional mechanisms of making agreements, it is always possible to agree to or change its terms. Still, it is hard to make these kinds of changes during the execution of smart contracts. The lack of a formalized smart contract status in global legal practice can make it difficult to resolve disputes that arise when its terms are violated.
To date, the use of smart contracts in everyday life has been limited by technical, legal, and social factors. Nevertheless, it is already clear that smart contracts have a future. Perhaps they will revolutionize the world of management and finance or simply automate standard processes. Either way, the potential of this technology gives room for new ideas.