To understand what a smart contract is, Szabo compared it to a vending machine (Levi & Lipton, 2018). He explained that users only have to drop the correct value of cryptocurrency to create and execute a smart contract, including payments and required documents such as permits, valid IDs, etc. Once the terms of the contract are established, smart contracts will implement them automatically. Both sides can just sit back and watch the deal unfold and be concluded. Currently, certain types of contracts must be concluded in writing where additional procedures may be necessary. These may be those required by state fraud laws and the Uniform Commercial Code (UCC). This shows that contracts do not always have to be included in a notarized text to become enforceable. This makes many pure code smart contracts also contractually enforceable at the state level. The characteristics of a smart contract affect the different phases of the contractual lifecycle. In the following, the phases that require a special legal assessment with regard to smart contracts will be identified. The focus is on German and European law.
In addition, different parties, completely unknown to each other, can participate in a highly secure business through the use of smart contracts. This robust system ensures that no form of fraud takes place and speeds up that a fixed transfer of funds takes place as planned. These are the main power exchanges that take place in decentralized networks such as Ethereum and Bitcoin. As they code traditional contracts, the law applicable to smart contracts is determined according to general principles. [38] This means that whether a valid contract has been concluded depends on the applicable law, which may, for example, require certain formalities. [39] This could lead to different assessments of smart contracts in different jurisdictions. With smart contracts, centralized agents are eliminated and replaced with decentralized distributed nodes that verify every transaction within the network. The time required to process and exchange information is significantly reduced through the use of blockchain ledgers. Once hybrid smart contracts have access to off-chain data on an Oracle network, they can replace traditional contracts. For example, weather insurance – a type of insurance that pays for extreme weather – is currently backed by traditional contracts.
If an Oracle network provides data on extreme weather events, weather insurance can be easily implemented through hybrid smart contracts. In general, any contract paid based on real events can be implemented on the blockchain as long as there is an Oracle network capable of providing this off-chain data. The term “smart contract” was first introduced about 20 years ago by computer scientist and cryptographer Nick Szabo while he was a graduate student at the University of Washington. According to Szabo: In short, with smart contracts, the phase of drafting the ex ante contract, which leads to automatic execution, becomes more important than ex post lawsuits. Whether the development of this new treaty concept requires a change in existing contract law is another question. The answer depends above all on how this new type of public procurement is taken into account by existing legislation. Smart contracts will formalize contracts more than traditional contracts. [46] It is simply for the reason that the code cannot be as ambiguous as a written text.
It is safe to assume that smart contracts, the common code, have difficulty implementing ambiguous clauses and principles such as good faith in continental law or fairness in common law. [47] Oracle networks are decentralized, so using an Oracle network does not require sacrificing the benefits of decentralization that blockchain offers. A smart contract that uses an Oracle network is called a hybrid smart contract. One solution is for the parties to use a text-based contract where the parameters that trigger the execution of the smart contract are not only visible in the text, but actually fulfill the smart contract. In our example, “less than 32 degrees” would not only be seen in the text, but would also create the parameter in the smart contract itself, minimizing the likelihood of inconsistencies. Some of the early adopters of smart contracts are insurance companies. In fact, the global blockchain market for insurance is expected to reach around $4 billion by 2023. In many cases, smart contracts have been shown to further improve the efficiency of insurance processes through proactive, real-time claims automation. No one really knows what the future holds. But at the rate at which this important technology is evolving, it`s best to learn more about smart contracts, whether you`re a lawyer, a legal assistant, or perhaps a paralegal student. This article explains the basics of smart contracts, the blockchain technology behind them, the main benefits and challenges of smart contracts, and other details. Some 47 U.S.
states have existing legislation that suggests that electronic documents and computer applications should receive similar legal outcomes to text documents. Nevada and Arizona, for example, have made changes to their local UETA laws to integrate smart contracts and other blockchain applications. Contracts between companies from different countries are often difficult because navigating different court systems is expensive and judicial systems in one country usually have limited power over companies from other countries. Hybrid smart contracts do not share this weakness; They don`t see nationality at all. Smart contracts are developing rapidly, but it may be some time before we see an outcome in the battle between smart contracts and traditional contracts. Nevertheless, technology offers many advantages. The Hedera network is compatible with the Ethereum virtual machine, allowing developers to write smart contracts with Solidity. Hedera`s contracts are optimized for Hashgraph, resulting in lightning-fast finality and predictable fees. Blockchain technology has laid the foundation for the transformation of global finance. The digital transaction book has spawned cryptocurrencies. And now, companies are also using blockchain in smart contracts.
Are smart contracts part of the risks associated with automation and are they ready to replace lawyers? Some of the strengths of smart contracts can work against them in some applications. As the validity or enforcement of smart contracts is increasingly evaluated, courts may need a system of court-appointed experts to help them decipher the meaning and intent of the code. Today, parties regularly call on their own experts when technical issues are at the heart of a dispute. Although federal courts and many state courts have the power to appoint their own experts, they rarely exercise that power. [16] This approach may need to be modified as the number of standard contractual disputes focused on the interpretation of the smart contract code increases. While oracles are an elegant solution for accessing off-chain resources, this process adds another part with which the parties would have to enter into a contract to enter into a smart contract, somewhat diluting the decentralized benefits of smart contracts. It also introduces a potential “point of failure”. For example, an oracle may detect a system error and be unable to disseminate the necessary information, provide erroneous data, or simply go bankrupt. Smart contracts need to take these eventualities into account before their adoption can be more widespread.
As of 2018, few states had passed laws recognizing smart contracts, and existing legislation was very modest. The fact that these states have resolutely adopted different definitions of these critical terms suggests that as more states follow suit, the pressure to adopt uniform definitions to reflect developments in blockchain and smart contracts could increase. Plans are currently underway to create smart contracts that can be terminated at any time and are easier to modify. While this contrasts somewhat with the immutable and automated nature of smart contracts, it reflects the fact that smart contracts are only commercially accepted if they reflect the commercial reality of the parties` actions.