Smart Contracts: New Agreements for the Digital Age
Smart contracts are self-sufficient and decentralized agreements for managing digital assets. In this interview, Alejandro Rothamel explains their nature and applications…
Alejandro Rothamel is a lawyer graduated from Austral University and holds an LLM from the University of California, Berkeley. For more than 10 years, he has practiced law related to technology issues, and advised various fintech startups as an external lawyer. He is currently the legal director of Ripio, a platform for buying and selling cryptocurrencies.
What are smart contracts and why do they matter for the future of law?
Smart contracts are agreements written in computer code that are executed automatically and immediately.
As a correlate of the real world, we can think of a vending machine. You put in a coin and the machine delivers a product.
Smart contracts are normally associated with transactions of digital assets in decentralized networks.
Although this is still a matter of discussion and there is no universally accepted definition, we can consider that the essential elements of a smart contract are self-sufficiency, decentralization and the management of digital assets.
Self-sufficiency means that there is a set of rules that govern a relationship between parties. The smart contract code establishes what to do if parties comply and what to do if parties don’t comply. And these rules are automatically executed.
Decentralization refers to the fact that smart contracts are typically associated with blockchain technology. The currently most widely used network for the execution of smart contracts is Ethereum.
Finally, smart contracts work with digital assets such as cryptocurrencies, tokens, or even cryptoassets representing assets from the physical world.
For example, a smart contract running on the Ethereum network can hold units of Ether (the cryptocurrency native of the Ethereum network) and move them from one account to another depending on the fulfillment or breach of the contract.
In short, a smart contract is a set of rules that two or more parties agree on. The difference with a legal contract is the way of writing it and the way in which it is executed.
A smart contract is written in computer code and runs automatically. A traditional contract is written in natural language and must be executed before a judge.
Why are smart contracts relevant for the future of law?
In our digital and interconnected society, we still have justice delivery systems built with three century old technologies. In a world where transactions occur in real time and at very low costs, justice systems are slow and expensive.
Smart contracts significantly reduce the cost and the execution time in the administration of justice.
If a certain event occurs, the smart contract will execute whatever is written in the agreement, without having to go to court. The contract acts as judge and enforcer.
Of course, the effectiveness of a smart contract will depend on whether it is possible to program in computer code what lawyers program in legal language.
I envision a future when one writes a contract in natural language and a program makes an exact translation into computer code. This tool would greatly expand the use of smart contracts.
In which areas can we expect higher adoption of smart contracts?
We can expect higher adoption in areas of the digital economy. Especially when it comes to digital assets such as cryptocurrencies and tokens.
On the contrary, we can expect less adoption in situations where an intermediary is required to certify whether or not something happened in the physical world. In these cases, an element of trust will always be necessary, which defeats the self-executing nature of the smart contract.
If I need a third party to announce “A” or “B” for the smart contract to act in a certain way, the self-sufficiency capacity of the contract is limited.
So anything that requires more complex contact with the outside world is a more distant candidate to adopt smart contracts.
How do the interfaces between smart contracts and the traditional legal world work? Do smart contracts have legal validity?
Currently, there is no interface between smart contracts and the traditional legal world. If, for some reason, I wanted to judicially execute a smart contract, it would be necessary to analyze its content through traditional channels.
This would require someone with computer expertise to explain to a judge what those lines of code mean and in what context they were agreed.
Smart contracts don’t fit in the traditional legal world. One could even argue they contradict each other. Precisely, what one seeks in a smart contract is automatic execution without the need to go to court.
In any case, it can be analyzed whether smart contracts can have legal recognition. That will depend on the rules of each legal system.