We believe that smart contracts are the future for some transactions, like transferring property or hiring a car. We have all heard the hype about the blockchain. Its rapid rise in popularity has caused a buzz not only in tech circles but around the world. This revolutionary invention has changed and will continue to change the way ordinary citizens contract, vote and exchange money. Smart contracts specifically are most widely used on the blockchain.
Smart contracts are cost-effective and very convenient as there is no passing of time between the conclusion of the contract and performance. It’s fantastic as you virtually can’t have a breach of contract because the creation of the contractual obligation and the performance of the obligation happen at the same time. What this should lead to is a dramatic decrease in breach of contracts and disputes. This is fantastic news for contractual parties and terrible news for litigation and conveyancing lawyers.
Looking to the future
Smart contracts hold very exciting possibilities for the future. Ordinary citizens can buy a house or car more easily. Governments can use smart contracts during elections to get more accurate results as every vote will be recorded publically. Crowdfunding initiatives can be more transparent as the funds can be coded to only be released when the goal is met. The future for smart contracts is bright and exciting and traditional third-party services will need to adapt to this major change in contracting in order to stay in business.
How does the blockchain work?
To understand smart contracts, you need to understand the technology used to execute them. The blockchain network makes use of a distributed database, recording every transaction in a ledger. Every unit is unique and traceable. Any changes to the ledger will be reflected on the shared ledger within minutes. When a transaction is made between two people there is a shared key attached to both sides of the transaction. This key can encrypt as well as decrypt the transaction as it passes from one person to another. Cryptographic keys are used in place of personal information, making the network more private than traditional exchanges. The blockchain uses cryptography as a security and privacy mechanism. Trust can be placed in the blockchain as each interaction is linked. Every transaction is public and the complete transaction history is always kept (immutable record keeping).
What are smart contracts?
A good and simple way to explain smart contracts is to think of a vending machine. By simply keying in the code of the item you want the machine will distribute to you your chosen snack. There was no need for a cashier to exchange the money in return for the product. Just like the absence of a cashier, in smart contracts, there is no middleman.
Wikipedia describes them as “A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract.”
Smart contracts are self-executing digital contracts where the terms and conditions between the parties are written into lines of code. They exist on the decentralised and immutable blockchain. People can’t always trust the party they are contracting with and that’s why traditional contracts have always been executed through a third party. With smart contracts, two parties can contract with each other without a third party such as a bank or a lawyer. The power is taken away from the middle man and people are now free to contract using a secure and accurate system. As the blockchain is decentralised the chances of modifying the data in any way is very difficult. Contracting through the public and secure blockchain eliminates the need for a third party.
What problems do they solve?
- Transactions can happen in all jurisdictions across all timezones whenever the parties so please.
- Smart contracts are automated so it removes the need for manual labour from third parties and the transaction is also cost-effective as there are no third parties.
- The actual conclusion of the contract is very fast as it runs on programming and not human effort.
- The system is secure and can’t be easily hacked.
- The exchange is accurate and immutable – could possibly eliminate problems like voter fraud during elections in the future.
How we can help
- Manage the risks associated with using smart contracts or consider whether to use smart contracts by asking our advice.
- Create a smart contract by asking for our advice.
- Create the contract terms by asking us to draft them for you. As tech lawyers, we know how to create the logic for smart contracts.
- Make sure your smart contract is legal and enforceable by getting our advice.
- Enable property transfers to be done using smart contracts by getting our advice.