Introduction: The Technology, Use-Cases, and Law of Smart Contracts

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Smart contracts-self-executed, autonomous agreements in the form of computer code hosted on a blockchain-are, according to many observers, poised to disrupt the theory and practice of contracting. The perceived advantages of smart contracts are manifold. They can facilitate the performance and execution of agreements without the necessity of intermediaries and are said to provide better security, enforcement and verification systems than traditional contracts. Moreover, they seem to be immutable, irrevocable and cost-efficient. This makes smart contracts an attractive and convenient option for many different types of agreement, particularly in a business context.

A smart contract is a tamper-proof, digital agreement that runs on a decentralised blockchain. As such, smart contracts have two obvious advantages over traditional arrangements. First, smart contracts are shared records, meaning that the parties do not need to keep a personal copy. This is a significant advantage, especially for modern companies where departments operating as silos may have conflicting working procedures resulting in no single or reliable record of truth.

Second, smart contracts are reliable, and execution can be relied upon to a greater degree than in the past. In traditional agreements, the deal might not be implemented as initially agreed by the parties, either due to a choice or mistake. Smart contracts operate in the blockchain environment where they are executed exactly as written and do not require any approval at each step. If the predetermined conditions are fulfilled, then the agreement is performed automatically.

Today, many transactions include a third party to handle the counter party risk that another party defaults on their obligations. The parties may be reluctant to perform their obligations if there is no guarantee that the counter party will reciprocate. One way to think about the emergence of platforms, such as Uber or Airbnb, is that they provide structural mechanism to solve this problem of counter party risk.

Blockchain's decentralised infrastructure, however, generates and guarantees trust without the need for intermediaries. According to advocates of these technologies, blockchain replaces trusted third parties with an open and secure protocol that all parties can trust. And, crucially, neither party can control or change the contents of the blockchain ledger as it is decentralised. Central servers are replaced with a decentralised network of computers that record all transactions in the shared ledger. In this way, distributed computing ensures the ledger is always accurate, and the decentralised network keeps the ledger secure.

As such, smart contracts are a scripting language overlaid on the blockchain that enables transactions on a blockchain that mirror 'real life' contracts by defining if/then conditions. For example, if an asset hits a certain price on a specific date, then a payout should be made to the other party (or parties) to the contract. A smart contract developer could programme the contract conditions according to any specifications. The if/then parameters are then tied to inputs and outputs of the smart contract. To take a simple example, consider a smart contract in the case of a car loan. If the borrower misses a payment (tracked via a blockchain-like technology) then the contract/code would not allow the use and operation of the car, ie, the contract would be automatically 'enforced ' via network technologies that disable the vehicle, rather than through the use of a third party. Such contracts may produce efficiency, timing and performance improvements as a result of the automation of the contract's terms. This automation is achieved by computer code, which controls the automated performance in the context of an Internet of Things environment where digital devices are interconnected.

As this simple example shows, a smart contract utilises code to execute an agreement. In addition, the term 'smart contract ' is also often used to refer to traditional text-based contracts in which the ordinary language text references the use of such a 'code-only contract' to effect some (but not necessarily all) of the provisions.

While smart contracts can be applied in many different situations, they are still in an early phase of development-they are a relatively new and untested technology and the range of possible and effective use cases is still being worked out. At present, the actual tasks that smart contracts can perform are relatively basic and straightforward. However, as the adoption of blockchain-based platforms and applications accelerates, the expectation is that smart contracts will become increasingly sophisticated and capable of handling more complex and diverse transactions.

However, the deployment of smart contracts in the real world still needs further testing. The relative immaturity of the technology makes them potentially vulnerable to hacking. The lack of regulation is also a bottleneck for the development of more sophisticated forms of contract. This means that we need a more integrated or interdisciplinary approach to such contracts. There are still multiple concerns to be resolved relating to the technology, business models, appropriate markets, consumers and the law. Moreover, such contracts inevitably raise regulatory issues that need to be addressed by policymakers. Several countries have already started to develop new regulatory approaches, as legal commentators identify issues with such agreements.

Addressing the many challenges created by smart contracts requires going beyond a single disciplinary perspective or frame of reference. In particular, integration of technological, business and legal issues is crucial. This edited volume brings together a series of contributions by leading scholars and practitioners currently working in this space to examine the main issues that are driving the development of smart contracts, as well as the current response of key stakeholders in technology, business, government and the law. As such, the book explores the critical technical, business and legal challenges created by these potentially game-changing technologies and attempts to devise sound practical solutions in a broader scope regarding the functional and non-functional requirements of such contracts.
Original languageEnglish
Title of host publicationSmart Contracts : Technological, Business and Legal Perspectives
Number of pages6
Place of PublicationOxford
PublisherHart Publishing
Publication date3 Jun 2021
Edition1st
Pages1-6
Chapter1
ISBN (Print)9781509937028
ISBN (Electronic)9781509937042, 9781509937035
Publication statusPublished - 3 Jun 2021

ID: 240243679