NewsSmart contracts and blockchain

Enero 19, 2022

The concept of smart contracts arose before or independently from the blockchain technology, as one with the ability to adapt to new scenarios by the very effect of its flexible clauses. Today, to this formula that emerged from the traditional theory of unpredictability and the technological and economic concepts of Nick Scabo and two Noble Prize winners (Oliver Hart and Benft Holmström, 2016) the contribution of technology and the Ethereum platform is added.

 Javier Eswards R.

The techonology platform: Ethereum

 The creator of Ethereum is the young Russian-Canadian Vitalik Buterin (31/01/1994). This platform has been described as a “combination of a decentralized digital mining network and a software development platform”, which facilitates the creation of new crypto-monetary systems that share a single blockchain (a public cryptograpich record of transactions) that is essentially a sort of “decentralized open sourced” ledger that, unmodifiable in its essence, operates in a similar way than bitcoin, but has broader possibilities such as those that are now beginning to be introduced operationally to generate new versions of Smart Contracts.

Smart Contracts

 The concept of “smart contract” arose from the evolution of traditional contracts, from the influence of Nick Szabo, in the 90ies, as well as economic concepts developed by Oliver Hart and Bengt Holmström, who received the Nobel Prize in Economics in 2016, but today, through the use of blockchain technology and the suppot ot the Ethereum network, takes a step forward seeking to generate an entire ecosystem of decentralization through thesed contracts.

As economist Gordin Tullock (1970) noted: “we tend to forget that technological progress also exists in contracts. People discover new ways of making agreements, and over time we derive considerable benefits from this kind of technological progress”.

Having said that, what can we understand today by smart contract? How does it differ from a traditional contract or from what the aforementioned economists proposed as such?

Until the insertion of blockchain technology, one could say that a contract is more or less “smart” to the extent that its written stipulations are able to anticipate unforeseen events and generate mechanisms of solutions or adoption of new agreements to respond to such challenges in an efficient manner, that is, adjusting what has been agreed to these new realities without the contractual relationship being terminated or becoming litigious.

But with Ethereum and digital technology (artificial intelligence, “AI” included), we are moving into such more ambition where traditional legal and economic science techniques are complemented by develpments in this area.

The advantage of these new smart contracts is that the realization of the promise and agreement of wills that the imply allows the legal act to become independent of the initial will of the parties (always necessary) and the object of the contract, that is that, its purpose, can be executed in time and in an automatic way. This would imply fewer interventions of the parties, more speed in the execution of the initial agreement, the possibility of connecting automatically and autonomously the processes that the object of a specific contract and other processes associated with the activity of the parties, can be carried out in a pre-established, flexible and safe way.

The concept of “denationalization” or “globalitation” of contracts of this type could also be added, to the extent that they can be executed trough digital platforms that are outside a specific law or jurisdiction and, likewise, it is not relevant where the parties that enter into them are located. This aspect, of course, also presents its risks and, undoubtedly, the availability of digital technology will require that state legislation take care of this issue and delimit its scope so that the possibility of pursuing the performance of contracts of thus type is not lost, the liabilities and damages arising from their breach are not left outside the tax system and the general liability regime establised in any legal system.

As Nick Szabo himself has explained, the potential of these smart contracts is enormous. Like a snack vending machine, these rely on “machinery” for execution, but it is not physical but code running on a blockchain platform.

Despite what its name suggest, smart contracts have nothing stricto sensu to do with AI, although it may incorporate elements of AI in certain modules or functions. Thus, “smart” refers primarily to their self-executing nature. Smart contracts are inmutable on terms of their execution, as conceived from the outset. This follows from the fact that their code base cannot be amended, at least not without the consent of the parties and the change of the initial code, which would imply its replacement by a new one.

For programmers, this immutability presents a special challenge, and its is difficult to see such programmers operating without the involvement of lawyers and other specialists who have to define what the contract should do within the space of its self-execution. As all code can have errors (as can all human acts), code that cannot be altered must be carefully written, as it cannot be corrected after it is published. In this sense, doing it accurately ab initio is more relevant that in a traditional contract because the effects of an error in them can be disastrous.

Today, in one way or another, we are already using a series of smart contracts that operate on digital platforms. They are simple contracts, such as those involving digital means of payment, provision of certain services (such as communication or streaming of audiovisual content), among others. But, based on them, it is possible to think of the potential advantages that they would offer in highly complex contracts: projects financing, EPCM, PPM, in the field of supply contracts and logistics chains, etc.

Since digital technology (at least so far), cannot autonomously and intelligently access information external to that initially considered and that has been possible to write it in the blockchain, it requires someone to provide that information so that the smart contract is automatically executed. In the digital world that reliable information provider is called oracle.

Advantages and Disadvantages

As we can visualize them today, smart contracts have many limitations, all of which are of a complex nature and make it very difficult to see their autonomy escaping from the need to be bound to a particular legal system and jurisdiction, depending on them. Moreover, it is conceivable that there is a need for the legislator to regulate this type of contract.

But it also clear that, as technology improves, digital tools will become more flexible and sophisticated, morereliable and will easily penetrate the contractual world.

One area where this can make a great contribution is in the safe execution of the contract, outside the judicial system, in terms of performance, damages, dispute resolution. Everything will depend on the effectiveness and precision with which the code has been written.

On a subject that today shows so many possible developments and changes in the world of contracts, it is possible to anticipate the need for lawyers and juristis, as well as the law schools that train them, to begin to consider within their curricula contents that allow interaction and effective dialogue between the world of law and the world of digital technology. Perhaps, sooner rather than later, lawyers, instead of writing a contract on a computer and taking it – if necessary – to a public deed, will have to know how to write the digital code of a smart contract that will operate from a blockchain platform. In this sense, we must keep in mind that the future is already here and its arrival is only accelerating.
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