Smart Contracts

A 'Smart contract' is a contractual agreement which is able to execute and enforce itself through the use of technology. The idea has been around for a while, but has gained significantly in popularity over recent years, particularly amongst digital currency enthusiasts. The peer to peer 'blockchain' technology of digital currencies such as Bitcoin, with its distributed ledger capable of verifying transactions between peers without the need for a central authority, is seen by many as the perfect foundation on which to build a protocol for creating smart contracts. A number of so-called 'cryptocurrency 2.0' projects - software projects which aim to build on the technology of first generation digital currencies like Bitcoin and add significant advances and extended functionalities, are being developed to include smart contracts. The most notable examples are Ethereum1) and Open Transactions2), although Ripple Labs have also discussed plans to add contracts into the Ripple protocol3) when it comes out of beta.

Types and Applications of Smart Contracts

A traditional contract exists as a written document which defines the responsibilities and rights of each party in a relationship. If the terms of the contract are breached, one or more signatories to the contract are then able to seek remedial action through the legal system.

A smart contract, on the other hand, exists as a software program. This software program, most likely built on top of a third party protocol, may do a number of things. It could automatically execute the contractual obligations of one or more of the people involved if the required conditions are met (automatically pay the worker his wage if he clocks in and out of work each day and doesn't get suspended or sacked, for example); this is an example of a self-executing smart contract. In some circumstances they could also enforce themselves automatically (self-enforcing), executing predefined consequences if the conditions of a contract are not met (dock the worker's pay an hour if he's late, to continue the earlier example).

There is also a great deal of potential for smart contracts to connect into the 'internet of things' - the increasing web of physical products and devices connected to the internet. This would increase the ability of a smart contract to observe whether the conditions of a contract are being fulfilled, as well as to take real physical actions based on the data it collects. For example, a hire-purchase car might lock its doors and refuse to let you drive it if you fail to make your repayments. Or to give another automotive example, a sensor on your car may monitor whether it is being parked in your garage or on the street, and adjust your insurance payments accordingly.

Why Smart Contracts Are Exciting

Self-executing smart contracts potentially eliminate the possibility of any of the parties involved defaulting on their obligations. Upon adding their digital signature to the contract they would effectively authorize the protocol upon which the contract was written to automatically perform their obligations for them, and (if it is done well), each person involved would no longer have the power to renege on what they have agreed to do. This would eliminate the need to have any trust in the person who you are dealing with, potentially making it easier, safer and cheaper to do business with strangers, and therefore facilitating global trade. This would also add a new level of security with the knowledge that, come what may, what has agreed will come to pass, as even people you trust may sometimes breach an agreement due to error or the pressure of unforeseen circumstances.

Self-enforcing smart contracts would add a greater level of flexibility, increasing the range and diversity of viable contracts. They would also be much cheaper and more reliable than traditional contracts, as they would not require the use of costly and time-consuming legal process to rectify any wrongs.

Why Smart Contracts Scare the Hell Out of Me

Although most would agree that the use of contracts is a wholly necessary part of modern life, the popular imagination often views contracts as somewhat sinister. Like the proverbial pact with the devil - you are often caught out by the small print, or by a different interpretation of the language. Part of the reason why contracts fail to deliver the protection they are supposed to give and end up becoming a negative force is because they are rarely used between equals. In our day to day lives we most often come into contact with contracts which are between a wealthy and powerful organization who drafts the contract themselves, and has the resources to use legal professionals and take plenty of time tweaking and perfecting the contract to suit themselves, and us as ordinary individuals who do not even have the time to read them (have you EVER read the terms of services of the websites and apps you use, or your full insurance contract, or anything like that?). Because of this they often serve to reinforce the power inequality between the corporation or other large organisation and the individual human being. Rather than protecting the individual person's rights, they protect the corporation against any action which the individual may wish to take if the corporation fails to meet the reasonable expectations of the consumer. The expansion of the use of contracts and their deeper integration into our lives which could come with smart contracts could make this even more of a problem. The idea that rather than 'small print', which however tiny or hard to read is at least in English, we may instead find ourselves being caught out by traps hidden within the quirks of programming code which is entirely illegible to most of use also scares the hell out of me.

Another possible problem comes from the sheer inhumanity of automated systems. The opportunities for us to deal humanely with people, to take individual circumstances into considerations, and to allow human concerns such as compassion to enter into our dealings with others has already been reduced in recent years. Smart contracts have the potential to massively accelerate this process and take it to a whole new level. Imagine, for example, a house which automatically locks you out the day your fail to pay your rent and which doesn't care that you're pay was just delayed for a few days and that its 10 below outside and you have nowhere to go (an extreme example, I know, but it illustrates a broader point).

The potential for machines and software programs to act in an inhumane manner and cause harm to people is clearly there, although the extent of this threat is heavily dependent of the specific implementation of smart contracts rather than being inherent in the concept itself.

E-Currency | Technology | Law | Software

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