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Blockchain

Smart Contracts – 3 Reasons You May Still Want a Lawyer

One reason for all of the excitement surrounding blockchains and cryptocurrency, in general, is that these technologies are giving birth to even more innovations. In the same way that electricity made an entirely new class of technology possible, blockchains are giving rise to a number of promising novel ideas. The smart contract is one of these ideas that blockchain enthusiasts are particularly enthralled by.

Smart contracts – which we will explain further shortly – are revolutionary for their ability to facilitate business and deals between parties. If all goes to plan, the idea is that disputes between parties should be resolved more or less automatically and without cause for litigation. Of course, reality is seldom this simple. As a result, it’s quite possible, and perhaps even inevitable, that some people will find the need for smart contract lawyers.

Indeed, there are several reasons people who participate in smart contracts may seek out lawyers. Before we get to those, though, let’s set the stage by getting to know a bit more about smart contracts.

What are Smart Contracts?

The simplest way to think of smart contracts is as electronic processes that automatically execute when their terms are met.

It must be admitted that although smart contracts have leapt forward in complexity thanks to blockchain technology, it’s not altogether accurate to say that they’re new. In fact, the first usage of the term “smart contracts” was by Nick Szabo in the 1990s, when he described a smart contract as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”

Early Smart Contract Example

For an excellent example of a simple smart contract that most of us have partaken in, we can look to vending machines, which some refer to as the earliest technologies utilizing smart contracts. As long as a vending machine is in working order, we understand that we can automatically execute business deals with them. For example, we can select a beverage for the price of $1, insert $1 into the vending machine, and then expect the vending machine to dispense our selected beverage. When this goes to plan, a smart contract has successfully been executed.

How are Smart Contracts Evolving Thanks to Crypto?

In the previous section, we acknowledged the history of smart contracts and the truth that they’ve existed before crypto. Generally speaking, however, modern day discussions of smart contracts are almost always in the context of blockchain technology. For a demonstration of this evolution of our perception of smart contracts, we can look to the definition provided in a paper published by the United States Department of Commerce:

Smart Contract: A collection of code and data (sometimes referred to as functions and state) that is deployed using cryptographically signed transactions on the blockchain network. The smart contract is executed by nodes within the blockchain network; all nodes must derive the same results for the execution, and the results of execution are recorded on the blockchain.

With our understanding of how they functioned prior to crypto combined with this updated definition, we can see that blockchain technology has served to enhance the possibilities, efficiencies, and complexities of smart contracts.

Examples of Smart Contracts in the Cryptocurrency Space

Thus far, we’ve explained smart contracts on a simple level, provided a simple example, and then gone into how smart contracts have become more sophisticated with blockchain technology. Naturally, the next step is to solidify our understanding with some practical examples of smart contracts in the crypto space.

  • Voting: Effective smart contracts have the potential to revolutionize voting with unprecedented accuracy and elimination of the need for trust. Smart contracts can execute as soon as choices are selected and submitted. With blockchain technology, the results of ballots can be transparent and free from errors, too.
  • Document Storing and Accessing: An essential step of the hiring process for many companies is processing paperwork. The storage and accessibility of these documents can be automated with smart contracts on a blockchain. Imagine that when a new employee completes his or her paperwork, a smart contract is executed, automatically tucking the relevant documents into their appropriate place on a blockchain. Now, the entire step of filing away that paperwork is automated.
  • Peer-to-Peer Applications: Well-written smart contracts may essentially remove the need for intermediaries in many private deals between two parties. Smart contracts remove the need for enforcement when one party fails to live up to their end of the bargain, for example; in this case, a smart contract simply wouldn’t execute.

3 Reasons You May Need a Lawyer Due to Smart Contracts

Ironically, one of the purported benefits of smart contracts is that they may remove the need for lawyers in many cases. With a firm foundation of understanding of what smart contracts are and how they’re used, however, we can comfortably move on to discuss the real-world reasons for which one may need a smart contract lawyer.

1. Smart Contracts Can Still Require Enforcement

Despite widespread belief among crypto enthusiasts, the perception of smart contracts as legal contracts is debatable, at best. Many have argued, for example, that the hope of removing the need for “enforcement” of smart contracts is flawed and ungrounded in reality, from the start.

Regardless of smart contracts’ ability to execute automatically when their terms are met, the potential for mistakes, ambiguity, and deception by parties that write and participate in them may be impossible to eradicate. For an extremely simple example of how disputes in smart contracts can arise, let’s revisit the vending machine.

Vending machines operate by a reliable and (mostly) trusted mechanism. This hasn’t removed the potential for disputes, though. Imagine the following two vending machine scenarios:

  • User deception: Have you ever seen or heard of the vending machine trick that some scammers utilize by attaching a string to a quarter? Using this trick, scammers have been able to deceive vending machines into executing based on payments that have actually been rescinded. If and when vending machine owners realize that this scam has been perpetrated, they would surely have cause for dispute.
  • Operator deception: Imagine, for a moment, an unscrupulous vending machine operator who decides to fill his or her vending machine with faulty merchandise. The operator may be able to fill Coke bottles with water dyed by food coloring, for example. When a customer fulfills his or her end of the vending machine smart contract and receives their “Coke,” they might be motivated to seek “enforcement” of the original agreement.

These examples may not pertain to cryptocurrency, specifically, but they demonstrate the ways in which the self-executing mechanism of a smart contract does not necessarily remove the potential for problems.

 2. Auto-Execution Isn’t Always a Good Thing

Proponents of smart contracts often extol the mechanism with which smart contracts execute automatically when their terms are met. While this may be convenient in many, if not most, cases, it will not always result in perfectly equitable outcomes.

The problem with the automatically executing nature of smart contracts is that the details of deals sometimes change in real-time. It’s not difficult to envision situations in which a deal may be fair and agreeable by both parties on Monday but then be totally unbalanced and unfair on Tuesday. Let’s consider an application in freelancing to drive this point home.

Let’s say freelancer Dave is hired to create a promotional video for Steve. Dave and Steve agree upon a smart contract by which Dave will submit a video and Steve will pay Dave for his efforts. The nature of the smart contract means that it executes once the video is submitted and payment is sent. However, it’s only after the video is submitted that Steve notices some glaring errors and omissions in Dave’s work.

Inherently, smart contracts are irreversible and unchangeable meaning that Steve will have some degree of difficulty resolving his issue with Dave.

 3. Technology isn’t Infallible

The history of cryptocurrency has provided several examples of the shortcomings of blockchains and the code that composes them. Hackers have successfully stolen huge sums of money from exchanges and networks. Unfortunately, there’s no way to guarantee that smart contracts aren’t vulnerable to attacks, as well.

When we imagine the potential for ill-gotten gains through hacked smart contracts, it isn’t hard to see why some people may be motivated to search out weaknesses in smart contract code and exploit them. All it takes for such a scenario to occur is an immoral individual to enter into a smart contract with an unsuspecting party, and then for that immoral individual to carry out a cyber-attack on the smart contract, forcing it to execute even before its terms are met.

Smart Contracts are Works in Progress

The above three reasons show us that smart contracts may not eliminate the need for lawyers, but instead provide entirely new situations in which we might need them. We can only look towards the future with hopes that innovations in smart contracts will improve them and that we’ll learn to accommodate their shortcomings.

In the meantime, understanding smart contracts, the opportunities they create for disputes, and the reasons why you might still want a lawyer for smart contract resolution will help protect you and your interests.

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