Smart Contracts. We’ve been hearing about them for some time, and often think about them in an ambiguous way. It’s a bit like the phrase ‘working smarter, not harder’- it’s opaque enough to have multiple meanings depending on who you’re talking to. But the term smart contracts is becoming ubiquitous for describing the combination of new technology (mainly blockchain), and the production, issue, and execution of contracts. But what is a smart contract and how is blockchain involved?
The term smart contracts was coined by computer scientist Nick Szabo in the US in 1994, and in the simplest of definitions is a self-executing digital contract, one that requires no human intervention. Vending machines are often cited as the first type of smart contract; once the machine understands you have the correct money, the candy bar automatically appears.
When you add blockchain into the mix it means that the contract is converted to digital code and then stored and replicated across a number of computers that run blockchain. Our quick definition of blockchain is a shared and constantly reconciled database – a digitally distributed ledger – across thousands or millions of computers. It’s open to all and easily verifiable, so information cannot be tampered with and is highly secure. Therefore, any transactions that affect the contract are automatically recorded and managed by blockchain and the outcome can be executed automatically. There are hundreds of blockchains out there, although Bitcoin and Ethereum are the most well-known, the latter the most highly used for smart contracts because of the speed of confirmations it can achieve.
But are smart contracts the way forward and can we trust a network of computers to perform tasks previously undertaken by skilled lawyers? Here are five things you need to know about smart contracts:
1. Smart contracts are the future, but we’re not there yet.
The day when blockchain is executing complex legal agreements, without the need for lawyers, is a long way off. This may never happen. Simple contracts that are coded and automatically execute once predefined agreements are met already exist. There are many organizations who offer a service to code and add your contract to a blockchain. And no doubt this remit will expand, up from simple ‘if this then that’ style contracts, to more complex agreements. But there will not be a time in the foreseeable future where lawyers are omitted entirely from the contracts process.
2. Smart contracts won’t necessarily mean less work for lawyers.
While smart contracts might take some of the grunt work out of writing, issuing and executing simple contracts, it doesn’t necessarily mean less work for lawyers. The more complex contracts and ones that require certain levels of ambiguity or require a subjective trigger before execution will still be bread and butter. Not only that, but with smart contracts, someone still must draft the contract with legally binding principals for it to be coded and then executed, so it isn’t necessarily less work, just different work.
3. Smart contracts are trustworthy. To a point.
The fact that blockchain is a distributed ledger means there is no single owner and therefore no-one can manipulate the code or contract – all transactions are recorded and supervised by hundreds of networked computers. Above this, they are visible to everyone who can access that blockchain, making them entirely transparent. All transactions on blockchain are encrypted which makes them very hard to hack. But blockchain, like all technology, is subject to bugs and because blockchain is open to all it can take time to gain consensus on how to fix them. This leaves windows open for potential hacks. Also, there is no central repository of known vulnerabilities, breaches or attacks, which makes it hard for people to know where the holes or bugs may be. So, while blockchain is a secure technology, making your smart contracts safe, there are still issues to overcome before it is 100% reliable.
4. Lawyers won’t become coders. Probably.
While it’s undeniable that smart contracts will become commonplace at some point, it’s unlikely that lawyers will be required to code. What could happen is that lawyers use a hybrid of smart contracts integrated into their work, but without needing to understand the technical jargon. Most people use a PC today, but they don’t necessarily understand how the motherboard or RAM work. The other route that could develop is that lawyers and coders will become partners. Law firms will hire a raft of coders that work hand in hand with contract lawyers who write the terms in legal language that the coders then program to become executable code.
5. Smart contracts are an opportunity for lawyers.
Smart contracts are going to change the way you work. There’s no doubt in that. And there’s no doubt that some lawyers and law firms just won’t see it through those changes. For the more adaptable lawyers, smart contracts will represent a new way of working; new risks to assess, new legalities to evaluate and new advice to give. Customized contracts won’t disappear, and legal guidance will always be sought, but now it’ll be alongside a smart contract that saves you time, opens new areas for clients to need a lawyer and creates positive disruption in the market.
While lawyers won’t be morphing into computer programmers (or vice versa) anytime soon, smart contracts are going to have a fundamental impact on the way legal agreements are made. And, while some lawyers will sit back and watch, waiting for this change to reach them, others are already assessing the landscape and maximizing all the early opportunities that are available. Gaining knowledge and understanding that technology is the first step – getting some hands-on experience of smart contracts will help dispel any myths or fears. After all, anything that can take some of the drudgeries out of contract drafting, leaving highly trained lawyers free to do higher fee-earning projects is surely an opportunity that shouldn’t be passed up.