Smart contract

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Smart contracts, as defined in the work of Nick Szabo are an abstract concept relating to the automated performance of an already agreed contract. In short, they are programmable and auto-executable agreements, built on the template "if this than that".

Legal definition in Arizona: "event driven program, with state, that runs on a distributed, decentralized, shared and replicated ledger that can take custody over and instruct transfer of assets on that ledger". Reference

The metaphor often used to understand smart contracts is a vending machine: it is programmed to spit out a bag of chips as soon as the required payment is introduced. This metaphor makes evident one important property of smart contracts, which is the inevitability of the outcome once the trigger conditions are met. This leads to agreements that don't need reinforcement or a justice system to protect them, unlike written agreements or contracts between two individuals for example, one promising the other to do something if and when stipulated conditions are met. In this traditional case, one party may decide not to fulfill the agreement, in which case the other party can rely on the justice system for reparations. In the case of smart contracts the outcome is guaranteed when the conditions are met, the contract cannot be breached by any party, therefore there is no need for a third party to guarantee the agreement. The problem with this simple mechanistic representation of a smart contract is that in real life situations may be complex, and not all aspects of this situation can be modelled into a smart contract. Wherever room for interpretations is left our of a formal smart contract will require litigation, which is a process that happens outside of the infrastructure providing support for this smart contact. Once that happens, one needs to rely on the legal system. See problems below.

Smart contracts and the legal system

From Wikipedia:

International private law and legislation of various jurisdictions require to identify the location of an asset or place of an agreement in order to solve conflict of law problem and determine the applicable governing law. "However, the distribution of the register across nodes in multiple jurisdictions raises a seemingly intractable problem – under current legal principles at least – as to where the situs should be."[Ref] Holding something on DLT, including smart contract or title to an asset, does not isolate it from the legal system and laws of respective jurisdiction. "Some blockchain enthusiasts may have misinterpreted the statement 'code is law' as implying that code can supersede the law or that decentralised networks create their own legal regimes." - Ref: Eliza Mik, 'Smart contracts: terminology, technical limitations and real world complexity" (2017) Law Innovation and Technology Vol 9 No 2, 269.
In case of a dispute between the parties of the smart contract within the DLT, the issue arises where the distributed ledger is located in order to determine the place for dispute resolution. "Blockchain also poses questions concerning the ability to identify the parties to a transaction, to the extent a system utilizing this technology remains anonymous, which may rise a host of additional issues related to dispute resolution."- Ref: Reggie O'Shields, 'Smart Contracts: Legal Agreements for the Blockchain' (2017) North Carolina Banking Institute Vol 21, 177.
To facilitate the self-execution, a smart contract needs access to sources of event information through which the execution of its terms and conditions is assessed. The solution to the issue of access to information may require use of so-called 'Oracles' – an external party (or a machine) providing the judgement to determine whether or not respective conditions under the agreement have been met. "The oracle's digital signature would be retained on the distributed ledger so that parties could review the payment process and confirm that payments were made correctly." - Ref: Jenny Cieplak and Simon Leefatt, 'Smart contracts: A smart way to automate performance' (2017) 1 Geo L Tech Rev 417.

Applications to makers movement

Contracts between local makers, in the digital humanitarian sector by MakerNet, Contracting using Blockchain. Scalable of contracting so as many makers as possible can use the contracting model. MakerNet project to build proof of concept for contracting system on a contracting standard over the next two years. MakerNet

Can be applied to gain access to financial tools, insurance, which can be onchain services.

See also


Ricardian contract