Smart Contracts and AI: Pioneering Trends in Modern Contract Management

Smart Contracts and AI

With the soaring digital sustainable business models, smart contracts and AI have become a new wave of the transformative era. Contract management has undoubtedly grappled with manual processes, physical signatures, and data management. These two cutting-edge technologies are driving forces to reshape the existing business landscape.

Role of Smart Contracts and AI

Smart contracts are self-executing and run on blockchain. These contracts consist of terms in the agreement between any buyer and seller directly written into lines of code. According to a report, the global smart contracts market size reached USD 684.3 million in 2022. It is expected to grow at a CAGR of 82.2% from 2023 to 2030

The major role of smart contracts is to carry transactions and agreements among disparate, anonymous parties. It simply eliminates the need for a central authority, external enforcement mechanism, or legal system.

To leverage smart contracts in your business for enhanced trust and transparency, you must define the terms and determine how transactions and related data will be represented on the blockchain. You must reach an agreement on the rules governing the “if….then” conditions. It will help you construct smart contracts based on the required specifications.

On the other hand, AI is automating the entire contract lifecycle management process, ensuring pitch-perfect optimization and eliminating the grunt work. AI has the power to replicate human processes and learn on its own. So, you train your AI-powered contract management tools to:

  • Create standardized templates
  • Analyze data to determine costs, risks, and abnormalities
  • Send specific contracts to relevant legal bodies automatically
  • Set reminders for contract expiry and renewal dates for seamless functioning
  • Identify incorrect clauses automatically

How can Smart Contracts and AI work together?

The integration of smart contracts and AI seems to be promising in addressing traditional challenges in blockchain technology. These are pioneering trends in the modern contract management landscape, reshaping businesses.

Undoubtedly, smart contracts are robust in their primary functionality, encountering challenges when handling complex transactions, rigid designs, and adaptability to changes. However, integrating AI can dramatically improve the mechanism of smart contracts while addressing these limitations.

AI implementation can take the technology to the next level by introducing cutting-edge analytical and predictive capabilities. The importance of AI in contract management will be witnessed after its integration into smart contracts. It will empower smart contracts to analyze data, identify patterns, and make informed predictions about contract outcomes. It will help you increase efficiency and improve decision-making.

The blend of AI and smart contracts has the potential to revolutionize transactional processes, making them more flexible, efficient, and effective for businesses.

What are the Benefits of Integrating Smart Contracts and AI?

  • Increased Automation, Improved Efficiency

Smart contracts are generally predefined with rules and conditions, automating the execution and enforcement of contracts. However, AI integration can enable this system to understand, analyze, and act on contract data like a human. It will reduce manual intervention, ensuring error-free contract execution.

  • Ensure Accuracy and Compliance

When you combine these two highly efficient platforms, staying ahead of regulatory and legal compliance. The automation of processes will ensure that all parties adhere to the terms and conditions defined in the contract, reducing the risk of disputes.

  • Mitigate Contract Risks

AI has the power to retrieve and analyze historical data and identify patterns and trends in the contracts, indicating potential risks. It can also predict future risks based on factors such as non-compliance, financial risk, ambiguity, unclear terms, etc. It will help you proactively manage and mitigate contract risks in the long run.

  • Reduce Operational Costs

When you automate repetitive tasks involved in contract management, like contract execution, negotiation, and management, integrating these advanced tools can cut operational costs by 50%, allowing you to reclaim valuable time on strategic business goals.

  • Ensures Transparency and Reliability

If you are running a legal business, smart contracts can provide a transparent and immutable record of transactions. However, AI integration will improve the transparency of the process by auditing and verifying contract data for the parties involved. This legal tech will enhance contract automation immensely.

  • Enhances Scalability 

With smart contracts and AI-powered tools, you can scale and handle massive contracts efficiently, regardless of your business size. It is one of the ideal ways to stay ahead of contracts and your competitors in the long run.

Use Case of Smart Contracts and AI Across Industries

Industries like healthcare, real estate, corporate structures, gaming, and mortgages are popular for automating contract management processes. Let’s quickly overview a few cases of smart contracts and AI:

  • In 2017, Delaware passed Bill 69, allowing businesses to incorporate and manage contracts using blockchain technology. That’s where decentralized autonomous organizations (DAOs) began handling automated contracts.
  • Several states of the US are already leveraging smart contracts and AI in the legal industry for specific contexts. For instance, Arizona State allows enforceable legal contracts to be created via smart contracts. On the other hand, California enables marriage licenses with the same technology. 

Common Challenges and Risks when Leveraging Smart Contracts and AI

Smart Contracts and AI offer innumerable benefits, but they also come with their own set of challenges and risks. Let’s explore some of the common challenges and risks below:

  • Integrating technology into existing processes can be complex, demanding significant changes to workflow.
  • Staying compliant with regulatory requirements can be difficult in highly regulated industries like legal.
  • Ensuring you meet the data privacy regulations can be complex if you handle highly sensitive contract data.
  • Algorithms can inadvertently create data bias based on historical data, resulting in wrongful decision-making.
  • Technology systems are more vulnerable to cyberattacks and attempts, posing security risks.

How Contract Management Services Can Add Value

Contract management services are an ideal solution to leverage technology fully and assure accuracy with human validation. These service providers have a dedicated team of experts to draft, review, and execute your contracts efficiently. These services can help you:

  • Enhance efficiency and productivity
  • Mitigate risks and ensure compliance
  • Deliver cost savings and favorable terms
  • Provide real-time visibility and strategic insights
  • Streamline workflows through automation
  • Improve customer and vendor relationships

The Future of Smart Contracts and AI

Smart Contracts and AI have a bright future that looks transformative on many levels. Blockchain and distributed ledger technologies powering smart contracts and are expected to revolutionize how contracts are created and carried out. They will continue to automate and self-execute activities in various industries.

While this continues, artificial intelligence will further improve contract management by offering enhanced analytics, natural language processing, and predictive insights. The sophistication of AI-driven contract analysis will rise, assuring compliance, risk minimization, and strategic decision-making.

Additionally, integrating AI and smart contracts will allow for dynamic, self-correcting contracts that react to actual events, taking the contract management process to the next level.

Author Bio: Kelli Hall is a skilled legal professional at Cogneesol and a prolific writer specializing in creating informative and engaging content. With a strong background in law and a passion for effective communication, she excels in creating articles that simplify complex legal concepts. Her attention to detail and meticulous research ensure the accuracy and reliability of her work. Through her articles, she aims to share her knowledge and insights with a wide audience, contributing to the legal community and promoting a greater understanding of legal matters.