Myth: smart contracts are legal contracts
Alas, my friends, the crypto-messiahs hath punked us. In the name of “Satoshi-the-wise” impure words were spoken by the righteous followers of the blockchain.
I jest, but the price-driven mania around blockchain has led to some interesting claims, usually in very lazy media reports on this technology’s future prospects.
Much of the source for confusion between Smart Contracts and Legal Contracts is that we all casually refer to Legal Contracts as just “contracts” when other domains, like computer science, have appropriated many of the concepts, but without a full translation.
There are some amazing technologies and quite a few use cases for blockchains in the legal industry. As someone with a toe on both worlds, hopefully I can help frame an understanding.
If not Legal Contracts, what are these?
TL;DR: Its a programming concept
Many years ago, I worked as a database developer on enterprise SQL Server projects, so much of the way I think of Smart Contracts is in that context. In T-SQL, the language of SQL Server, there is a concept of a “Service Broker,” or a mechanism to queue machine-to-machine messages, verify their delivery, and ensure eventual execution of a task across databases. It kind of abstracts away a lot of the messy guts of computers talking to each other in a reliable manner… mostly because developers don’t want to learn about yet another programming paradigm like MSMQ, RabbitMQ, ActiveMQ, etc.
Inside of Service Broker, each arrangement for guaranteed message delivery and execution is called a Contract:
Contracts define the name of a specific business task and list the message types used in that task. Service Broker contracts define two different service roles: the initiator and the target. The initiator of a conversation begins the conversation by sending a message to the target. The contract that the conversation uses defines which service role can send messages of a given message type. — Microsoft TechNet article on Service Brokers
Other database systems and programming languages have similar concepts. This pattern arises frequently because, as a developer, you often want to have a guarantee that some bit of code on another system is going to run.
Linguistic context
Blockchains were created by programmers, not lawyers, so it’s helpful to start from that linguistic perspective when thinking about that “contract” word. Smart Contracts certainly have features that we humans sometimes associate with Legal Contracts, like definitions, exchanges, or transfers of rights, privileges, and assets, but passing similarity doesn’t make those concepts directly transferrable to Legal Contracts.
To a developer, there are just as many concepts that cross between Smart Contracts and the rest of their understanding. Blockchains are kind of like a database (fine, that’s a massive oversimplification). In that way, Smart Contracts are kind of similar to other guaranteed execution frameworks like Service Broker, but they also have the features of a distributed system and are quite a bit more extensible, which makes them immensely more powerful. But, they’re still not Legal Contracts.
Legal implications
Smart Contracts do have legal effects, just like Legal Contracts. A Smart Contract can be the method used to memorialize a legally binding agreement, in the same way one could use a paper document, an e-signed contract, a click-wrap agreement, or other legal forms of agreements.
There are, of course, new complications on the legal side. For example, your counter-party’s identity may not be known, a fairly novel capability enabled by Smart Contracts with strange consequences for jurisdiction.
Letting script kiddies design your contracts could lead to some very bad outcomes. — Mark Flood
As the DAO mess and innumerable hacks based on poor Smart Contract design have shown, Smart Contracts are just as vulnerable to abuse and misuse as traditional contracts, but with new and exciting horrors in obtaining relief. There are myriad opportunities for bad actors, but also some pretty cool new capabilities for legal interactions.
Crossing the Rubicon
There are projects, like the Stanford Computable Contracts Initiative (SCCI) that aim to foster formal specifications, languages, monitoring, and compliance with tools like translators between traditional legalese and various Smart Contract systems, but many of these efforts are still quite early stage.
Some of the current challenges include: Absence of standards, domain-specific approaches, absence of software tools, and poor cross pollination between disciplines.
For more on this, check out this excellent summary for the recent SCCI working session.
EDIT: If you’re interested in this space, also have a look at the excellent open source work happening on the Accord project and thanks to Peter Hunn, founder of Clause, for reminding me!
EDIT2: Oh, I forgot… there’s also Mattereum, and OpenLaw, and like a dozen more projects or startups working to build bridges between Smart Contracts and Legal Contracts. There is some great work happening out there to bridge the gap — but there is a gap (for now).
Final shitty stock photo
