Will Smart Contracts Ever Be Legal?

Imagine a world where your house is sold using a smart contract

The time has finally come. With smart contracts, even the lawyers are put out of jobs by machines.

Is that really true though?

The answer is it depends on the context and the situation in which smart contracts are used. There are two camps to this argument. The people who believe that smart contracts are just one step towards a self-governing society and people that believe the nature of work lawyers do will never change at all.

I find myself to actually be in between both camps, and more convinced than ever that technology will take over society sooner rather than later. Read on to find out what are my thoughts regarding this.

Uses Of Smart Contract

It all started with the Ethereum network introducing smart contracts to the world. A piece of technology where both parties agree on the parameters of an agreement is put it into a code and the transfer of cryptocurrency will be carried out based on the actual events that took place.

An example of this is as follows:

Arthur bets Brandon that Chelsea will beat Liverpool in tomorrow’s match by a score of 2–0. If Arthur wins the bet, he will receive 100 tokens. If Brandon wins, he receives 80 tokens. Both of them agree on these terms, put the respective amount of tokens in the smart contract that is held in escrow till the end of the match.

Once the match has ended, an Oracle will verify from third-party sources (sports websites, social media) the actual results of the match. In this case, if Chelsea did beat Liverpool by a score of 2–0, then the 100 tokens held in escrow will be sent to Arthur’s wallet, and he will get back his 80 tokens as well since he won the bet.

Even betting in football can be on blockchain

Note the “if… then” nature of smart contracts. For the transfer of tokens to happen an event within the parameters of the smart contract has to happen first.

The main benefit that I see when it comes to this is the automation of transactions. This will be very useful when it comes to transactions that happen on a constant basis and the parameters of the agreement require little to no change. It will save costs and time, as the third-party is taken out of the equation.

What If There Is A Dispute?

This is the main question we have to ask ourselves when it comes to whether smart contracts can be legally binding. I am not sure about you, but I got this feeling if you ask a lawyer this question the answer will be a frustrating answer – “It depends”.

When dispute resolution fails, use your fist

While that is most certainly vague, it is true. However, the more important question should be “What portion of a lawyer’s work does a smart contract disrupt?” If we look at the “if… then” nature of smart contracts, the main aim is to ensure the correct outcomes are achieved based on parameters set in stone and the external events are verified by third-parties (Oracles). While that is all good, what if a dispute arises? That to me is one of the main reasons why lawyers are getting paid for their work- To resolve disputes.

Disputes can arise for various reasons. Below are a few reasons:

  • Vague terms — “Best effort”, “Good faith” and “Perform according to best practices”
  • “He said, she said” scenarios, whereby in the absence of a middleman one or both parties can argue that what was written in the smart contract was not what was initially agreed upon
  • Results received from Oracles- You have two or more third-parties who provide varying results.

Some projects have added in the role of an arbiter (a member of the community) to resolve any disputes between two parties. However, the selection criteria for arbiters are usually individuals who stake the most number of tokens. This seldom if ever gives confidence to both parties that the decision awarded by the arbiter is the right decision. Similar to how subject matter experts are brought in to resolve disputes and provide their professional opinion to a judge, disputes that happen in the blockchain space should be brought to an expert for diagnosis.

Therefore projects that want to resolve disputes within the community should look into appointing arbiters that are qualified experts in the field. The selection criteria can be determined by the community. However, even if that can be executed perfectly there is still a fatal flaw that prevents smart contracts from being a legal document in most cases.

No Room For Error

The nature of smart contracts takes away the intermediary and it is a challenge to change the parameters. While this brings about efficiency in terms of time and cost, it means that changes are difficult to make.

For transactions that involve huge amounts of money, there will be many revisions and changes made to the agreement, even after the agreement has been put into effect. This represents a huge challenge, as it is difficult to change the code in smart contracts, especially after it has been put into implementation and transactions made are irreversible.

Furthermore, this is under the assumption that the code in the smart contracts are free of error and will be executed according to plan without any malfunction. This is virtually an impossible guarantee, and many developers will not want to provide this guarantee.

Lawyers To Learn How To Code?

Instead of technology taking over the legal industry I believe it to be more of the integration of technology into the work of lawyers. As smart contracts begin to be more widespread amongst enterprises, lawyers may be required to understand the code and look at the smart contracts to understand the legal implications before advising clients.

While that may not happen in the near future, forward-thinking lawyers will do well to take up coding in their free time. After all, what is there to lose!

Connect With Me!

Always interested to learn more and connect with blockchain enthusiasts. You can find me here:

Website: www.blockconstellation.com

Email: jiayung@blockconstellation.com

LinkedIn: https://www.linkedin.com/in/jia-yung/


Will Smart Contracts Ever Be Legal? was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.