What Are the Key Differences between a Smart Contract and a Traditional Financial Contract?
The primary difference lies in execution and enforcement. Traditional financial contracts are written in legal language and enforced by the legal system, requiring intermediaries like lawyers and courts for dispute resolution.
Smart contracts are written in computer code, stored on a blockchain, and self-execute automatically when predefined conditions are met, minimizing the need for intermediaries. This makes smart contract execution faster and often cheaper, but also more rigid, as traditional contracts can incorporate ambiguous terms like "best efforts" which code cannot easily interpret.
Glossar
Traditional Financial Contracts
Structure ⎊ Traditional financial contracts, such as standardized futures, options, and swaps, are formal, legally-enforceable agreements detailing the terms of a financial transaction, relying on centralized clearing houses and legal systems for execution and dispute resolution.
Smart Contracts
Function ⎊ Smart contracts are self-executing agreements with the terms of the agreement directly written into lines of code, residing on a decentralized ledger.
Contract Execution
Mechanism ⎊ Contract execution, within cryptocurrency, options, and derivatives, represents the automated or manual fulfillment of pre-defined agreement terms when specified conditions are met; this process leverages smart contracts on blockchains or traditional clearinghouse protocols to minimize counterparty risk.
Smart Contract
Code ⎊ The contract is fundamentally self-executing code deployed on a distributed ledger, embodying the terms of the agreement in an immutable format.