Smart Contracts aren’t a new concept, but they are in the blockchain. Although Ethereum and its innovation may not help in replacing contract law immediately, they are working in augmenting current traditional methods and may eventually become law.
As far as two decades ago, Nick Szabo believed that a contractual clause can be implemented in software in order to make the infringement of contracts very expensive. According to him, a “Smart Contract” is a computerized transaction protocol that executes the terms of a contract. Meaning that they are automatically enforced from continually rechecking themselves in case any terms have been met.
These contracts are now working together with blockchains to help many different industries, such as smart property, financial services, digital rights management, etc. Surely a technology like this isn’t limited to just law.
What is the biggest benefit of using this technology over the traditional method? The efficiency of the process is far greater, inasmuch that smart contracts can allow for a greater overview of the entire process, further facilitating the security around “exceptions” that might pop-up because of accidental negligence. They are also self-enforcing meaning there’s no need for a third party that is usually critical in traditional contract law enforcement.
The concept isn’t new though, as mentioned before, so Ethereum is not the first project that attempted to develop a smart contract. Ethereum saw the power of decentralized ledgers and developed a key component missing from Bitcoin’s blockchain: a Turing-complete programming language. The Ethereum stack-based bytecode language allowed for incredible efficiency in processing and combined with their token system allowing for the development of smart contracts.
But these contracts aren’t law. If you ask people in IT, you’ll hear something along the lines of “They’re a mutual-agreement outside of jurisdiction”, but law completely opposes that. Theirs is that nothing can be outside of a jurisdiction, which gives any man/woman the right to raise a matter in the courts. So it will take a while before the foundations of law are replaced.
Ethereum’s goal, for now, is just that: replacing small parts, corks, and screws. They work side-to-side or independently with traditional contracts. Replacing parts of it so long as the two parties agree to a mutual agreement of their use. This gives Ethereum smart contracts a chance to automate, making a process far more efficient and quick than if it were to be handled manually. This would also take less manpower, meaning less money.
Although the technology seems very unlimited for now, we must first understand some inherent technological limits. For example, if the expectations for smart contracts are that they will completely handle a system that includes from domestic to international laws, then no. It would take artificial intelligence (not current AI, but Terminator 2 level AI) developed specifically for them for it to handle complications that can arise within that habitat.
This means that although the technology is very powerful in replacing some complications, it will take time before it becomes a very common asset to use. Traditional laws must be broadened in meaning for them to be legally binding more easily, which can also give a path to a new job category – IT and Law can become intertwined in a new field because of Ethereum’s invention, which is very exciting and possible. Currently, smart contracts are akin to an IFTTT between contracting parties.
Although they are not, as of now, AI smart, these contracts can still perform incredible tasks in an automated fashion. The concept of DAOs is one that is very exciting. Decentralized Autonomous Organizations are organizations that are run by rules hard-coded into smart contracts.
What it means is that if jurisdiction permits, DAO’s could replace entire public documents along with the third parties and essentially handle all the paperwork of a company. But that’s an ideal case.
The critical concern is during the development of these DAO’s, these hard-coded contracts now have become law, and it isn’t as easy to just change the law. In essence, if a bug escapes from development, then people will abuse that bug because it is within the law now. This is what happened during TheDAO attack and it is why it became such a huge controversy after it was voted by majority hash rate because it was legal and you cannot change laws simply if it fits someone’s benefit.
Once we begin to stretch the boundaries of law in congruence with this technology, developers of these contracts will become a necessary tool to have because, even as of now, it saves time and labor, which is very critical in today’s startup grind.
How these changes will take effect is a very frustrating question to ask, because people need to be educated very thoroughly to the extent and limits of smart contracts. And since blockchains are a very complex idea to understand because they are quite abstract this is a difficult task.
Though very innovative and groundbreaking, smart contracts need time to develop as per every technology, not rushing into manipulating the basic principles of what makes us human: our rights in law.