Smart contracts have recently been used in association with blockchain platforms and technology. The blockchain platform, which acts as a type of digital ledger, ensures that the coding used to develop the contract remains well protected and executed. When code from a smart contract is copied across a new block within the blockchain, it takes the effect of executing a provision in the contract.
As an example, Chen describes how smart contracts could be used in earnout payment agreements that are becoming a more frequent feature of M&A agreements during the pandemic, as volatile markets and the economy often make deals riskier for buyers.
Earnouts are payments made to the seller by the buyer following a transaction, if the business purchased meets certain financial metrics that are agreed on by both parties. It is an incentive for the business to continue to do well after the transaction.
Chen says a smart contract could be used to handle making earnout payments, using the programmed metrics and timetable for payment that have been agreed on, removing the potential for human error and third parties, yet providing secure blockchain technology.
Prior to the pandemic, Chen says the combination of using blockchain technology and smart contracts was becoming increasingly popular, and this trend will likely continue as the markets look to new platforms to weather future pandemics and global crises.