Nowadays, every item seems to be getting a smart counterpart (many perhaps not worthy of the tag). We now have smartphones, smart watches, smart lighting, smart fridges, smart TVs and now we even have houses that are called smart homes. Against this backdrop, it should come as no surprise to anyone that we also have smart contracts. In actual fact, the concept of smart contracts is not particularly new, albeit, with a relatively recent implementation. The concept was first developed in 1994 by Nick Szabo, a cryptographer. Szabo came up with the idea of recording contracts in the form of computer codes which would be self-executing, thereby dispersing with the need for trusted intermediaries. Of course, the idea could not be implemented at that time because there was no Blockchain Technology, neither was there an alternative system of making irreversible transactions on the internet. Thus, the first implementation of smart contracts came with the development of Bitcoin in 2009, which not-so-incidentally was also the first meaningful application of Blockchain Technology. So just what exactly are smart contracts?
Smart contracts are self-executing contracts with the terms of agreements between parties being directly written into lines of code. The code and the agreements contained therein exist across a distributed decentralized blockchain network. The implication of a smart contract being based on the blockchain is that it is stored on a public database and cannot therefore be changed. Evidently, two distinctive qualities prove themselves indispensable to any discourse about smart contracts: its self-executing quality and its irreversibility; the former forms the core distinction of smart contracts from their traditional counterparts. Smart contracts are self-executing because they work on an If-Then premise, that is, certain terms are set, stating certain conditions or events that must occur to trigger execution, upon such occurrence the contract is executed (mostly a transfer of value) and is thus settled. This way, parties are not dependent on one another for fulfillment of obligations, neither are they dependent on any ‘trusted’ intermediary to secure execution. This is particularly useful in that, parties unknown to each other can easily enter into a contract without anxiety, since the trust needed in the contract is invested in the system rather than in each other.
It is important to state that while smart contracts are indeed based on the basics of a traditional contract, it would be grossly misleading to view them completely in the same light. The two types of contracts differ with respect to execution as already explained above. Also, a valid traditional contract is deemed a legal agreement, on the other hand, the codes in a smart contract embodying the terms of the agreement are not automatically endowed with such recognition, although this might be possible under certain circumstances. In order for smart contracts to be accorded considerable legal recognition, many techno-legal questions still have to be resolved.
One fact remains quite clear, smart contracts do have several benefits which are only possible as a result of the separate position it occupies from traditional contracts:
First, smart contracts afford parties a considerable degree of transparency as the terms and conditions with respect to an agreement are laid out bare in absolute detail, to be thoroughly checked by parties before agreeing to them. Furthermore, the lack of intermediaries in smart contracts ensures that efficiency is not lost due to communication gaps. Also, Smart contracts, as a result of their online nature, can be completed at incredible speeds, thereby saving precious time. With this speed comes a new dimension to contract-making in various fast-paced industries as well as bringing about a convenience that a traditional contractual process would struggle to attain. Smart contracts, when implemented correctly, have been said to be able to provide a greater degree of contractual security. In addition, with smart contracts, every agreement, every process, task and payment can have a digital record and signature that could be identified, validated, stored and shared; thereby, making for a better data storage.
The possibilities made foreseeable by the advent of smart contracts are so wide that they cannot be comprehensively exhausted in this article, however, in order not to create a misleading utopian image of smart contracts, it is necessary to shed light on some of its limitations:
The premise upon which the usefulness and potentials of smart contracts seem to be based, is that it is minimally plagued with problems. While this might be true (to an extent) in the present major use of smart contracts, that is, crypto currency; it is hard to imagine that this level of smoothness would continue to be maintained as the use of smart contracts breaks into other industries as has been projected. Smart contracts, not being very much endowed with legal recognition, do not have a dispute resolution structure comparable to their traditional counterparts. Thus, the efficiency of smart contracts largely rest on the lack of disputes, that is, an ideal setting, which of a fact would not be the case 100% of the time. In fact, it is not difficult to imagine some problems that would make situations very much unideal, for instance: some smart contracts are completely written in lines of code, one of the parties to the contract might not be well versed in interpreting the code and might end up entering into an agreement substantially different from what he intends, what would be the remedy in such a case? There could also be a misrepresentation of goods and since smart contracts can be completed online, what would be the remedy for the buyer in such an executed contract? Also, who would be held responsible for coding errors which render a smart contract utterly different from what is intended? What about the issue of jurisdiction in smart contracts completed between multiple nationals? All these are questions that come up and without a doubt, there are more. An examination of the development of contract laws in various countries reveal complexities that make contracts much more than simply parties, agreements and terms. It is therefore obvious that smart contracts are far from perfect as they do not yet have a satisfactory response to these possible (and in fact expected) complexities.
Indeed, smart contracts have quite the bag of potentials, however, it remains important that we do not get ahead of ourselves. In this vein, there is a need for the creation of some requisite framework that takes into account the peculiarities of smart contracts, as this is the only way through which the idea of smart contracts can be reasonably enjoyed without the positives being outweighed by the negatives.
Fabarebo Victor is a 300 level law student at the University of Ibadan. He takes interest in technological innovations and loves learning about multiple perspectives to issues.
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