Smart Contracts: What they are, and how they affect attorneys
There have been many different types of criticism of cryptocurrency in the years since its inception. Scholars and economists have both scoffed and praised bitcoin as something new but relatively unknown. While there has undoubtedly been a bubble growing in the cryptocurrency market, bitcoin and the many other types of currency are here to stay. When one imagines cryptocurrency, he immediately thinks of bitcoin, the forerunner to all the other digital currencies. What many do not understand however is exactly how many different types of cryptocurrencies exist and the different attributes they possess. The website Coin Market Cap lists approximately 1,037 different crytocurrencies, among these is a currency called Ethereum, the second most valuable currency next to bitcoin with a market cap of $100 billion. What made it so popular is a new attribute that is turning cryptocurrency into a tool to a wide variety of workers and enterprise owners alike who are looking to cut costs.
This new attribute is called the smart contract. As the name would suggest, it is a feature that includes a contract encrypted into the code of transactions. So rather than one completing a tangible contract on paper, there is a digital contract encoded with the currency that allow specific transactions to be carried out so long as they meet the requirements of the contract. The process of a smart contract has been compared to step by step process of using a vending machine. When using a vending machine the ultimate goal is to get a snack. First, the machine tells you to insert money, once inserted the machine then tells you to type the code for respective snack, then once you follow through with the next step the machine finally drops the snack.
Albeit put in very simple terms, this is the smart contract process. The ultimate goal can be acquiring a prodcut or a service but before any perforance can be rendered, one must following through with steps of the contract and it is only until the system checks off on each condition that is written into the code that the transaction will be completed. On top of which each transaction is traceable, transparent and irreversible. Smart contracts are also more than just coded contracts programmed to execute upon the meeting of its terms. They also interact with other contracts, make decisions, store data, and send the cryptocurrency, ether, to others.
The parties are the ones who draft the contract which gets put into code, and it is the Ethereum network itself that performs the execution. In the legal world, going to court is generally not the preferred method of choice. So a self enforcing and self executing contract offers great potential as it can save parties, the time and resources of going to court as well as reduce the amount of cases filling a court’s dockets. According to CoinDesk, ethereum’s smart contracts have the following attributes as well
- Functioning as ‘multi-signature’ accounts, so that funds are spent only when a required percentage of people agree
- Managing agreements between users, say, if one buys insurance from the other
- Provide utility to other contracts (similar to how a software library works)
- Store information about an application, such as domain registration information or membership records.
So where do lawyers fit in all of this?
Smart contracts seem to take out the middle man in this equation and reform contracting to algorithms. The issue however is that coding and the law are two very different things. When writing a code and programming responses, it is very black and white. Either the conditions in the code will be met and one will proceed to the next stage or they will not be met. The law however is very gray as it constantly needs interpretation. Even in contracts there is more than simply meeting the terms or not. There are nuances such as substantial performance, material and non material breaches, and modifications that make attorneys necessary. Not to mention there is also a necessity in knowing the law behind whatever the said contract is about, be it corporate finance, real estate or any other type of law. For despite its enforceability through the network, it is still a contract subject to the law.
Therefore is the middleman truly cut out in a smart contract? As smart contracts take on a bigger role they will bring about a merger between two very different worlds. Coding and law. Areas of law will be created solely around coding, with attorneys who will use their knowledge of traditional law to create more nuanced codes that cater to the gray, ambiguous nature of the law. This would all be completely possible as the ethereum network uses coding language that is ‘Turing-Complete’. This means the language is designed to support a wide variety of instructions that makes the language of coding less black and white.
Despite the allure of the name “smart contracts” the ethereum network is not that different from how bitcoin works. Bitcoin transactions also operate through blockchain technology. The blockchain is a long encrypted ledger that keeps track of all transactions made. But while bitcoin was designed to be an alternative currency, its purpose ends there. Ether, through its smart contracts, intends to branch into other areas of peer to peer transactions, financial services, real estate, health care, supply chains, etc.
Barclays the State Bank of India have already begun implementing early stages of smart contracts in their systems. By having smart contracts, companies can speed up the amount of transactions they can process and reduce the risk of fraud. Ultimately however, smart contracts are still being developed and although they are able to remove the middle man through some areas such as crowdfunding/fundraising, there is still a need for a human element in regards to smart contracts in a legal sense. This was one of the items listed in a position paper by Barclays which analyzed how the bank would use smart contracts in the future. Among their apprehensions were the irreversability of transactions, and as coding language is further advanced it is likely that this feature will be changed as insitutions frequently have to reverse transactions, to combat fraud and human error.
The last five years have shown a dramatic increase in the desireability of coding. A number of app based companies such as Uber, Lyft and Amazon are taking the stage and at their centers is a strong coding language. Although still in early development, smart contracts seem to be the next step in doing business. In the future many attorneys may find knowledge in coding very practical as they will be able to work with an increasing number of companies and firms that rely on smart contracts to boost efficiency. So while smart contracts do not render attorneys obsolete, it would behoove an attorney to become familiar with the smart contract as he or she may receive a number of clients in the future with claims involving smart contracts.