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Introduction to Smart Contracts

Smart Contracts were genearlly consideded to have been invented by computer scientist Nick Szabo, probably around 1993, to emphasize the goal of bringing what he calls the "highly evolved" practices of contract law and related business practices to the design of e commerce protocols between strangers on the Internet.

A good definition of a smart contract is a blockchain transaction with extensive instructions embedded into it. It is a method of using Bitcoin to form contracts between people via the blockchain.

Smart contracts differ from legal contracts in that they are executed automatically whereas a legal contract requires trust for the contact terms to be executed, with a sanction of damages to be imposed by a Court in the event of breach. The smart contract is defined by its code whereas a legal contract is defined by its written terms. It is said that the three elements that distinguish smart contracts from legal contracts are;

  • autonomy: once the contract has been launched the parties do not need to take any further action
  • self sufficiency: in their ability to marshal resources by raising funds and then deploying them 
  • decentralisation: the blockchain resides on a distributed network rather than one centralised server

The example that is often used to describe the smart contract is vending machine where the functions are set in place when the coin is placed into the slot and cannot be varied, altered or stopped. The process continues until the eventual result is achieved and the goods that have been ordered arrive at their destination ( the container at the bottom of the machine). As Lessing said, 'Code is Law' in that the code will execute no matter what.

In the leading work, 'Blockchain: blueprint for a new economy' by Melanie Swan'

'There are many considerations raised by smart contracts and systems of cryptographically activated assets with regard to whether or not we need a new body of law and regulation that distinguishes between technically binding code contracts and our more flexible legally binding contracts'

 It is this area where reseach is required, to consider whether or not existing contract law needs to be updated to cater for a self executing process that can not be aborted. Regulators and courts will have to struggle with the concept of decentralised code running 'after the fact' where the effects could be more wide ranging than could have been reasonably forseen. Smart contracts will probably incorporate a chosen governing legal framework as is currenly occuring in e commerce transactions conducted over the interent.

Of real interest to the author is the potential impact of ADR [Alternative Dispute Resolution] in the field of automated contracts. For a number of years, commentators have been predicting the growth of ODR - Online Dispute Resolution which developed as an academic movement whose leaders included Professor Ethan Katsh [who founded the National Center for Technology and Dispute Resolution]  Steve Abernethy who founded Squaretrade, which until recently was the Ebay dispute resolution service and Colin Rule, the co founder and Chief Operating Officer of Modria.com, an ODR provider based in Silicon Valley.

Most of the computing world is currently engaged in the development of the Internet of Things [IOT] and the effects that 'Big Data' will have on the lives of ordinary people. Although commentators have written extensively about the dramatic effects of IOT as a 'shifting paradigm' [ See for example The Zero Marginal Cost Society: The Internet of Things,The Collaborative Commons and the Eclipse of Capitalism by Jeremy Rifkin) it is the belief of the author that Smart Contracts are destined to sweep the world as banks and financial institutions race to adopt Blockchain technology for fear of missing out in the next internet bonanza.

This blog will look at various legal and technical aspects of smart contracts that will arise as entrepeneurs increasingly look to smart contracts as the main next step in the Future Internet. The next article will look at the various platforms that are being developed to allow people to write their own smart contracts as a sensible starting point on what is hoped to be an interesting journey.

Jeremy Barnett 6th January 2016.

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