Smart Contracts - a 2 minute read

[yanerlim]

I have been reading up lately on smart contracts and found it interesting. So I would like to share a few things here on what I have learnt!

what are smart contracts?:
Smart contracts are a blockchain-based technology which executes and self-perform through coded instructions based on the information that is replicated and stored on a blockchain.

what is a blockchain?:
A blockchain is essentially a public ledger that allows the public to modify, contribute and store data records. It is highly secure because it is protected by powerful cryptography, and it is transparent and reliable because it is public and everyone can see each other's transaction on this digital ledger. It essentially cuts out the middleman of transactions, which renders this technology a MASSIVE DISRUPTOR in many industries.

3 main takeaway points on smart contracts:
1. It optimises the workload of a contract lawyer and made transactions transparent, convenient, reliable and cost/time effective. The opportunities it poses for clients, firms and lawyers are apparent.
2, Lawyers need to adapt its role when integrating this technology in their work. Issues such as having to recreate certain legal concepts (esp abstract ones like 'in good faith') to be compliant with code, and having to consider the multi-jurisdictional aspect of blockchain and take measures to resolve cross-border conflicts. This changes the priorities of contract lawyers and the complexity of the work they undertake.
3. This technology exists in an unregulated landscape, we can predict the rise of regulatory controls on blockchain and cryptocurrencies.

For more reading materials:
https://hackernoon.com/even-the-bes...lawyers-out-of-work-anytime-soon-a224736e0235
http://www.cms-lawnow.com/ealerts/2018/02/building-blocks-of-the-future

Feel free to add more to this summary (I wanted to keep it short and informative) and feel free to correct any information I have gotten wrong! Let's discuss more about this exciting new legal technology.

 

[Jaysen]

Great concise summary. @kaveesha has also written some fantastic articles in this area!

 

[Jaysen]

For those of you interested writing about blockchain/smart contracts in your applications, Reed Smith published a very detailed white paper earlier this year: https://files.reedsmith.com/files/Uploads/Documents/2018/Blockchain.pdf.

 

[bronson]

I have been reading up lately on smart contracts and found it interesting. So I would like to share a few things here on what I have learnt!

what are smart contracts?:
Smart contracts are a blockchain-based technology which executes and self-perform through coded instructions based on the information that is replicated and stored on a blockchain.

what is a blockchain?:
A blockchain is essentially a public ledger that allows the public to modify, contribute and store data records. It is highly secure because it is protected by powerful cryptography, and it is transparent and reliable because it is public and everyone can see each other's transaction on this digital ledger. It essentially cuts out the middleman of transactions, which renders this technology a MASSIVE DISRUPTOR in many industries.

3 main takeaway points on smart contracts:
1. It optimises the workload of a contract lawyer and made transactions transparent, convenient, reliable and cost/time effective. The opportunities it poses for clients, firms and lawyers are apparent.
2, Lawyers need to adapt its role when integrating this technology in their work. Issues such as having to recreate certain legal concepts (esp abstract ones like 'in good faith') to be compliant with code, and having to consider the multi-jurisdictional aspect of blockchain and take measures to resolve cross-border conflicts. This changes the priorities of contract lawyers and the complexity of the work they undertake.
3. This technology exists in an unregulated landscape, we can predict the rise of regulatory controls on blockchain and cryptocurrencies.

For more reading materials:
https://hackernoon.com/even-the-bes...lawyers-out-of-work-anytime-soon-a224736e0235
http://www.cms-lawnow.com/ealerts/2018/02/building-blocks-of-the-future

Feel free to add more to this summary (I wanted to keep it short and informative) and feel free to correct any information I have gotten wrong! Let's discuss more about this exciting new legal technology.

I would also add to this that not all blockchains are necessarily "public" ledgers. You can divide blockchains into three different categories:
1. Public (permissionless) - anyone can use this and view it if you download the software e.g. BitCoin
2. Consortium (permissioned) - a group of network users all need granted access to use it and the outside public cannot view it e.g. R3 Corda (used by businesses/ financial institutions)
3. Private (permissioned) - completely private like an intranet to be used internally in a company (I don't know any well known examples off the top of my head, but I know the National Archives in the UK was/ is trialling it to store all records on there - not sure on the public accessibility)

This makes the adoption quite interesting as it is highly unlikely that the business world will suddenly chuck all their private and sensitive information onto a "public" ledger. What I think will happen (and what is already starting to happen) is that businesses will roll out consortium/ private versions just to test the waters. Saying that, one really interesting example of a public blockchain if you're interested in finance, is the AUD$100m 'Kangaroo Bond' (very Australian) that the World Bank and Commonwealth Bank Australia issued in August. This was issued and distributed all completely on a public blockchain.

On the topic of Smart Contracts more specifically I think we are a long, long, long way off it being used as the norm in the legal world. It has helped law firms to store and archive contracts themselves more efficiently. But, as you said there are certain terms such as 'reasonable' and 'good faith' that are hard to program into solid code. There are also a heap of issues such as if the code doesn't execute how you intended it to, who is liable? The programmer? The blockchain's host? Either counter-party? Again, if you are interested in finance, KWM and ISDA released a joint paper on how smart contracts could be used to standardise legal documentation in derivative contracts.

Nevertheless Smart Contracts are also doing some great things in the world. You can now get compensation paid out instantaneously on a blockchain for some flights in the EU if it is delayed...

 

[Sophia Dali]

Let's say there is a smart contract between a seller and buyer. Would that be public? If not, in what way do smart contracts promote transparency?

 

[bronson]

Let's say there is a smart contract between a seller and buyer. Would that be public? If not, in what way do smart contracts promote transparency?

The name "smart contract" is actually really misleading and the guy who coined it, Nick Szabo, regretted calling it that because of what its actual function is - it is not a legally enforceable contract. A smart contract its essentially a bit of code that is designed to automatically produce a certain result when certain events happen. So the action of X and Y happening = the result of Z. A more practical example is say when the temperature on a farm remains above forty degrees for a period of five days then this would trigger an insurance payout to the farmer for any damage to their crops. Or when a manufacturer acknowledges receipt of materials then then this automatically triggers the release of funds from their bank account to the material provider with no manual human intervention needed.

So it isn't a written legal contract, but it can have certain basic (very basic at the moment) legal obligations coded into it. But for the purposes of this example let's use the example above of a manufacturer and a producer. The manufacturer and material provider may enter into a written legal contract to provide materials. They agree that they will use a blockchain for this transaction to track materials and then release funds on delivery of goods. Let's say that in our example they use a permissioned blockchain (private, see above) and only they can see what goes on. Both the manufacturer and materials provider would be able to see where their goods were (i.e. processing, customs, in transit). The smart contract itself wouldn't necessarily promote transparency, because this is literally a bit of code which most likely only the developers of the blockchain would be able to understand. It is more the transparency of the blockchain itself and the stages of the transaction that blockchain derives its benefits from, and the smart contracts are the driving force behind it.

IBM and Maersk (the shipping container company) have slowly been expanding their blockchain platform to improve efficiency of shipping cargo and provide a good real-world example https://www.coindesk.com/ibm-maersk-finally-sign-up-2-big-carriers-for-shipping-blockchain.

 

[Sophia Dali]

Thank you!

The name "smart contract" is actually really misleading and the guy who coined it, Nick Szabo, regretted calling it that because of what its actual function is - it is not a legally enforceable contract. A smart contract its essentially a bit of code that is designed to automatically produce a certain result when certain events happen. So the action of X and Y happening = the result of Z. A more practical example is say when the temperature on a farm remains above forty degrees for a period of five days then this would trigger an insurance payout to the farmer for any damage to their crops. Or when a manufacturer acknowledges receipt of materials then then this automatically triggers the release of funds from their bank account to the material provider with no manual human intervention needed.

So it isn't a written legal contract, but it can have certain basic (very basic at the moment) legal obligations coded into it. But for the purposes of this example let's use the example above of a manufacturer and a producer. The manufacturer and material provider may enter into a written legal contract to provide materials. They agree that they will use a blockchain for this transaction to track materials and then release funds on delivery of goods. Let's say that in our example they use a permissioned blockchain (private, see above) and only they can see what goes on. Both the manufacturer and materials provider would be able to see where their goods were (i.e. processing, customs, in transit). The smart contract itself wouldn't necessarily promote transparency, because this is literally a bit of code which most likely only the developers of the blockchain would be able to understand. It is more the transparency of the blockchain itself and the stages of the transaction that blockchain derives its benefits from, and the smart contracts are the driving force behind it.

IBM and Maersk (the shipping container company) have slowly been expanding their blockchain platform to improve efficiency of shipping cargo and provide a good real-world example https://www.coindesk.com/ibm-maersk-finally-sign-up-2-big-carriers-for-shipping-blockchain.