Smart Contracts: Where Law and Computer Science Meet

New technology is not good or evil in and of itself.

It's all about how people choose to use it.

—David Wong

Vargas, L. (2019). DYI Coding [Digital illustration]. Dribbble. https://dribbble.com/shots/11896098-DIY-Coding

After addressing blockchain and NFTs in previous articles, it is important not to leave smart contracts out of the discussion, since the concept is an important technological innovation in the blockchain world. So, what are smart contracts, why are they referred to as smart contracts, and are they really that smart?

The concept of smart contracts isn’t new, but with the explosion of blockchain technology and Bitcoin, smart contracts have gained more prominence and are now being taken more seriously.

Simply put, smart contracts are computer programs -pieces of code- that host specific automatic and self-executable information and run in a blockchain, which is their underlying technology. Smart contracts are based on scripts -computer coding- that cannot be changed, and they can be created by a person or a computer.

Although they are referred to as contracts, they neither look like the classic long paper contracts that we are used to nor can they spontaneously make decisions. Smart contracts execute what they have been programmed to do according to the coding instructions. The analogy with conventional contracts stems from the fact that the creator of a smart contract can introduce in its coding instructions, terms, and conditions that are usually reflected in traditional contracts as well: what can be done, how it can be done, and what happens if certain conditions are met and vice versa. Smart contracts obey certain instructions reflected in their code, but they neither have spontaneous decision-making abilities outside their roadmap code (at least not yet) nor can they re-adjust if unexpected events occur. As Shermin Voshmgir, Tech Author and speaker of the TED Talk "Web3, Blockchain, cryptocurrency: a threat or an opportunity" puts it: “[Smart contracts] are pieces of code that codify business logic. […] They store rules, they verify rules, they self-execute rules.”

Since smart contracts run with blockchain technology, they are immutable, trustworthy, transparent, and fast. Accordingly, they can speed up the logistical, operational, and transactional steps of many industrial processes. Also, they dispense with intermediaries (middlemen) such as monitoring, auditing, or supervising institutions. Finally, there is no centralized authority that they depend on or that controls their enforceability. It looks like all sectors can benefit from smart contracts but, for now, they have mostly been utilized in the supply chain, finance, insurance, and banking sectors with promising results. Smart contracts are often used to automate the execution of an agreement, a workflow or to release payments when the conditions are met.

Beatty, R. (2018). The prophets of cryptocurrency [Illustration]. The New Yorker. https://www.newyorker.com/magazine/2018/10/22/the-prophets-of-cryptocurrency-survey-the-boom-and-bust

There are flaws affecting smart contract technology, however. Some of the main difficulties in implementation lie in executing the terms and conditions that the parties entering into agreements demand to be reflected in the smart contracts i.e., from verbal or written language to code language -for the contracts to be executed properly. This requires establishing the terms of the contract, the rules that will govern the transaction, the exceptions to the rules, and the dispute mechanisms among others. Thus, words like "reasonable," "fair," and "satisfactory" that are highly subject to interpretation on a case-by-case basis will prove difficult to transcribe into code language words.

In this regard, one of the legal debates surrounding smart contracts at the time of incorporating these contracts into traditional contracts is the fact that smart contracts, sometimes, find it hard to meet the traditional basics of contract formation, especially when automated transactions are at stake. These fundamentals include parties, consent, offer, acceptance, capacity, and consideration. Also, there are concerns about who takes responsibility and what happens next when the program or its code offers unwanted or unpredictable results.

Another issue to consider is computer programming. Oftentimes, bad programming of a smart contract, which leads to the malfunctioning of the instructions, is always a possibility. Wrong code writing is like drafting a bad clause in a traditional contract agreement. Although smart contracts' language may not be subject to interpretation like traditional contracts, bad code writing can lead to wrong results as well. Worse still, one can even have both, i.e., a flawed interpretation of the intention of the parties and bad coding. Therefore, a crucial condition for the success of smart contracts is computer programming. Associated with this, is the difficulty of (i) finding highly-skilled developers who can create and implement smart contracts and (ii) providing to the general population at least a basic understanding of the underlying structure and functionality of smart contracts (Imagine having to deal with smart contracts if understanding traditional contracts has already proved to be challenging.

In addition, "encryption", which is an essential characteristic of blockchain technology and, by extension, smart contracts is often seen as a potential threat. This threat does not apply to the technology itself, because it successfully guarantees privacy and security. Instead, it applies to criminal and fraudulent activities because it can also work as a tool to hide identities and incentivize criminal behavior like money laundering, precisely because of the identity protection that it offers.

Davis, A. (2019). [Untitled] [Digital]. The New York Times. https://www.nytimes.com/2019/07/14/opinion/kevin-mccarthy-privacy-blockchain.html

For now, smarts contracts, rather than being able to spontaneously decide how to proceed with a given scenario by themselves are trustworthy executors of intelligent instructions fashioned by humans. However, as this technology evolves, along with blockchain, NFTs, artificial intelligence, automated decisions, and deep learning, they may become better at applying human logic and reasoning. Maybe they will eventually surpass the human analytical and reasoning process when it comes to balancing the advantages and risks of a given situation and ultimately deciding on the best course of action when confronted with several options, thereby making smarter decisions than humans would.

Smart contracts are not exempt from controversies and issues to be tackled, but their potential to transform the way we execute transactions and the subsequent benefits are worth the effort. This technology is still on the rise and certainly, there’s still major room for improvement. For example, deliberate and progressive work on the issues of programming, encryption, and standardization of the processes of execution. Surely, smart contracts will offer a new way to close certain transactions and optimize industry processes. Notably, it will be difficult to accommodate legal jargon into code language--maybe not all transactions will be suited for smart contracts, but many of them will. The beauty of this is that two apparently distant sectors are inevitably drawn to interact with and understand each other in order for both to get the most out of the other and consequently, benefit society globally.

References:

BBVA. (2022, Mar. 29). Qué son los ‘smart contracts’ o contratos inteligentes. Blockchain. BBVA. https://www.bbva.com/es/smart-contracts-los-contratos-basados-blockchain-no-necesitan-abogados/

Bit2me. (n.d.). Smart Contracts: What are they, how do they work and what do they contribute? Academy Bit2me. https://academy.bit2me.com/en/que-son-los-smart-contracts/

Gibbons, K., Gleeson, S. and Scott, K. (2021, Sept.). Legal Considerations Around Smart Contracts: Contracts Between Computer Programs. Clifford Chance. https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2021/09/legal-considerations-around-smart-contracts-contracts-between-computer-programs.pdf

IBM. (n.d.). What are smart contracts on blockchain? IBM. https://www.ibm.com/topics/smart-contracts

International Organization for Standarization. (2019). Blockchain and distributed ledger technologies — Overview of and interactions between smart contracts in blockchain and distributed ledger technology systems. Online Browsing Platform (OBP). https://www.iso.org/obp/ui/#iso:std:iso:tr:23455:ed-1:v1:en

TEDx Talks. (2018, Oct. 9). How Smart Contracts Will Change the World | Olga Mack | TEDxSanFrancisco [Video]. YouTube. https://www.youtube.com/watch?v=pA6CGuXEKtQ

TEDx Talks. (2018, Dec. 20). Web3, Blockchain, cryptocurrency: a threat or an opportunity? | Shermin Voshmgir | TEDxCERN [Video]. YouTube. https://www.youtube.com/watch?v=JPGNvKy6DTA

Image References:

Beatty, R. (2018). The prophets of cryptocurrency [Illustration]. The New Yorker. https://www.newyorker.com/magazine/2018/10/22/the-prophets-of-cryptocurrency-survey-the-boom-and-bust

Davis, A. (2019). [Untitled] [Digital]. The New York Times. https://www.nytimes.com/2019/07/14/opinion/kevin-mccarthy-privacy-blockchain.html

Vargas, L. (2019). DYI Coding [Digital illustration]. Dribbble. https://dribbble.com/shots/11896098-DIY-Coding