The phenomenon of smart contracts

The phenomenon of smart contracts.

The blockchain technology, introduced with the advent of Bitcoin, is a network of computer devices – usually called “nodes” (further explanation at the link here) – that process and store data without a single point of control. Every modification of the data must be subjected to a validation procedure called “consensus mechanism”. For more information, please refer to these previous articles already published on this blog:

• “Inside Blockchain: the future is now”
• “Affidaty: what is blockchain”

Furthermore, blockchain technology allows for the programming of so-called smart contracts, a concept introduced in 1994 by Nick Szabo, a cryptography expert with legal expertise. Nick Szabo proposed that a contract could be converted into computer code to ensure automatic execution, i.e. software that automates a commercial transaction.

The vending machine is the most common example used to explain this concept: if the conditions are met (sufficient amount of money inserted for the selected product), the machine dispenses the product.

Smart contracts became popular with Ethereum, the first blockchain platform expressly designed for the development and implementation of smart contracts (further explanation at the link here). Other platforms with the same purpose have since emerged: a decentralized and distributed computer network that combines digital currency and unmodifiable agreements to implement automated transactions.

Platforms of this type are versatile and allow for concrete applications in multiple sectors, ranging from purely financial uses (payments and fundraising) to industrial ones (supply chain monitoring), from commercial ones (tracking of goods) to corporate ones (electronic voting).

In light of this process, many questions have arisen regarding the relationship between a smart contract and a traditional contract with the corresponding application of contract law.

Smart legal contracts.

In general, therefore, a smart contract is software and is not legally binding.

However, in the case where a contract does not require special formalities (such as written form) or sophisticated performance conditions, a smart contract designed to automate performance can be considered as an operational and automated transposition of a binding contract, as in the case of the vending machine.

In other words, by connecting a traditional contract to a smart contract, a document that is understandable both by humans and machines called a smart legal contract is obtained. And it is interesting to note how this term is actually a macro-category; it is sufficient to remember the hybrid model of “ricardian contracts” introduced by Ian Grigg in 1995.

The implementation of a smart legal contract makes it possible to automatically execute the traditional contract through blockchain technology.

On this point, the document placed in public consultation by the UK Jurisdiction Taskforce of the LawTech Delivery Panel is very interesting, which proposes a tripartition of smart legal contracts:

• “Solely Code Model”: only computer code not tied to any document;
• “Internal Model”: the contract is a document that includes natural language and computer code;
• “External Model”: the contract is written only in natural language with the express provision that certain obligations are executed through software.

Conclusions

The phenomenon of smart contracts is certainly in its infancy, but there are technological and legal elements to apply them with contractual validity in national and international trade with greater certainty and efficiency for the parties.

Today, this is possible for simple and objective obligations, but tomorrow, with the improvement and integration of technologies such as artificial intelligence and the Internet of Things, it will be possible to extend their application to more sophisticated and complex relationships.