The Curious Case of Smart Contracts
Towards a More Efficient and Honest Economy and Society
Smart contracts are evolving technology that continue to be the subject of heated discussions. This post is not about whether smart contracts should be called ‘smart’ or ‘contracts.’ It’s about what they are and can be, and how we expect them to evolve over the years.
What Smart Contracts Are and Can Be
Smart contracts — a term coined by computer scientist, cryptographer and legal scholar Nick Szabo in the 1990s — have become known to the world as transaction protocols running on a blockchain or distributed ledger, embodying the self-enforcing business logic of a multiparty application or business process. They can be used to formalize and automate the relationship between individuals and organizations (as well as things!) that participate in a network. Szabo called vending machines a primitive ancestor of smart contracts.
I believe that we can use smart contracts to do many interesting things. Beyond being the engines behind the tokenization of assets, applying them to code and automate a wide variety of business processes to increase trust and efficiency, has immense potential. Being able to hard-code agreements — involving rules of engagement and exchange of value — between multiple parties, takes us closer to the dream of a more fair and honest economy and society.
How Smart Contracts Are Programmed
Today, there are a variety of programming languages that are used to create smart contracts — e.g. Daml, Pact, Solidity, WebAssembly, among others. These are typically different from the natural language we use to draft agreements and contracts. Today’s smart contracts are not necessarily readable or understandable by the average user. [Well, I guess the ‘not understandable’ part applies — many times — to traditional legal contracts as well…;)] However, Kadena claims that Pact is a human-readable smart contract language.
Legality of Smart Contracts
What is coded in a smart contract is essentially a set of rules under which two or more parties agree to interact or transact with each other. If and when that set of predefined rules is met, the agreement is automatically enforced. Beyond all the obvious benefits of automation, questions around its legality pop up pretty often — just because something works in code, it doesn’t mean that it has a legal standing. Therefore, the question is: Are smart contracts legally enforceable? I believe they are, if they comply with applicable law. The same is true for traditional contracts. Contracts themselves can be either legal or illegal within the laws they are meant and required to follow.
In November 2019, The UK Jurisdiction Taskforce (UKJT) of LawtechUK published a legal statement, in which it says that under English law, a smart contract is capable of having contractual force. It also says that in principle, a smart contract can be identified, interpreted and enforced using ordinary and well-established legal principles. Two years later, the Law Commission published its advice to the UK Government, in which it stated that the current legal framework in England and Wales is able to facilitate and support the use of smart contracts, without the need for statutory law reform.
In the US, the state of Arizona passed House Bill 2417 into law, which allows enforceable legal agreements to be created via smart contracts. The state of Nevada also has legislation that provides a framework for the use of blockchain technology and the enforceability of smart contracts under Nevada law.
An interesting use case is that of the Hangzhou Internet Court in China — an online court created specifically to deal with e-commerce related disputes — which is embracing smart contracts for legal proceedings, mostly in the areas of online shopping and Internet finance. They built a three-dimensional model that consists of smart case filing, smart trial, and smart execution. The filing system verifies the digital contract and the progress of its execution, among other things. A case will enter and move through a judicial examination process, if and when the pre-defined filing conditions are met. The trial system automatically extracts the risk control points of the case, and assists with the generation of the case resolution. The execution system collaborates with relevant parties to check the properties of the person who is being trialled, and dishonest people are automatically included in credit blacklists.
What We Can Expect
As previously mentioned, smart contracts are evolving technology, and their use is still very limited. However, whether legal professionals want to accept it or not, smart contracts are — at the very least — challenging our current legal systems and processes.
In the medium term, I believe that contracts will likely evolve into a hybrid ‘human-code’ model, where a number of rules and processes are coded and automated, and validated via distributed ledgers, but there is still human intervention for cases where corrective measures are required. Let’s be clear: There are contractual arrangements that are really hard to program into a smart contract due to elements that are subject to value judgements and interpretations or there are too many contingencies to think about. Also, vulnerabilities in the code can make smart contracts flawed. However, loopholes also make traditional contracts flawed. In any case, technology disruptions like this don’t happen overnight.
As distributed ledger and smart contract technologies become more widely used, lawmakers and regulators will increasingly be faced with challenging questions. I believe that these challenges or developments in the market are healthy and should be welcomed as part of an organic evolution happening in the economy and society, and properly accommodated. Let’s embrace innovation that has the potential to make our everyday lives easier and fairer, and save us time and money in the process.
