Posted by Post Authored By: Natalie Elizaroff
Offer, Acceptance, Consideration. Whether you’re a law school student or an established attorney, you know the basic elements of a contract. This understanding of contract law, followed closely by the phrase “meeting of the minds”, is crucial as many businesses approach a hybrid model of performance in view of a post pandemic world. Worldwide studies have revealed that many workers want a mix between working from the office and working from home during the workweek. [1] This model has also shown that on average, over 60% of survey participants reported being happier due to the hybrid work model implementation. [2] Advances in technology can accelerate transformation into a hybrid workspace and ensure that a hybrid model continues to be an option in the future. One noteworthy aspect of technology that has emerged and increased in popularity since the pandemic has been ‘smart contracts.’
What are Smart Contracts?
A smart contract is code that is programmed on blockchain technology. As noted in my previous article on NFTs, blockchain is a type of digital shared ledger of transactions maintained by a series of computers on a network which distributes the shared data and is accessible to all network participants. [3] More specifically, a smart contract is a self-executing contract with the terms between buyer and seller already programmed in the code. Smart contracts have several defining features: (1) they exist on the blockchain and accordingly, they have a state – like RAM – and that state of being is shared across the entire network (meaning any node running that specific blockchain has a copy of the smart contract); (2) they cannot be altered without alerting the network; (3) the transactions that run through smart contracts are traceable and transparent.
Many sources compare smart contracts with vending machines. Vending machines provide a certain good without the need for a third-party to take the money and then hand over the product. Smart contracts are programmed using the same logic, which eliminates the need for an intermediary to facilitate the agreement.
History of Smart Contracts
Smart contracts were first proposed in 1994 by Nick Szabo. Nick Szabo is a computer scientist, legal scholar and cryptographer known for his research in digital contracts and digital currency. In 1998, Szabo also designed a digital currency called BitGold, the ten-year precursor to Bitcoin. Szabo defined smart contracts as “computerized transaction protocols that execute terms of a contract.” [4] His goal with smart contracts was to extend point of sale (POS) systems to the digital realm and eliminate the third party. In his paper, “Trusted Third Parties Are Security Holes,” he expresses the inherent security risks with using trusted or third parties. He goes on to explain that by substituting the third party with a self-executing protocol, it eliminates room for error and personal agendas.
“A trusted third party is one that does not exist” – Nick Szabo. [5]
How Do Smart Contracts Work?
Anyone can write a smart contract and upload it on the blockchain network. The only prerequisite is having knowledge of coding in a smart contract language (Solidity or Viper) and then having enough Ether (ETH) or Ethereum to deploy it. This second step is the digital transaction fee for the smart contract to be added on to the blockchain and made executable. The fee to add it to the blockchain is commonly referred to as “gas.” Gas refers to the unit that measures the amount of computational effort required to execute specific operations on the Ethereum network. [6] Accordingly, the more complicated a smart contract, the more gas that must be paid to execute it. The gas/fuel system acts as a gate to prevent numerous and complex smart contracts from clogging the blockchain.
In simple terms, smart contracts are a series of “if-then” statements, compiled together on a blockchain. Once deployed, the contract code is replicated across multiple nodes of a blockchain. This replication enforces security, permanence, and stability. A network of computers then reads and executes the terms if and when the pre-determined conditions have been met. If no such transaction has been initiated or the prerequisites are not met, then the code will not take any steps. [7] If a condition has been met, then the program will proceed to “spit out” the predetermined result in view of the conditions that were input.
Where Can Smart Contracts Be Used?
Smart contracts are best used to automatically execute (1) the collection of payment in the event of certain criteria being met and (2) imposing a financial penalty if certain criteria are not met. They have also been used in a variety of corporations for various needs. Sonoco and IBM have used smart contracts to increase supply chain transparency in the transport of medication. Home Depot uses smart contracts for dispute resolution between vendors, thereby cutting the time needed to focus on disputes and allowing for more time to invest in the business. Smart contracts have also been used for real estate to take the place of a broker by streamlining the house-transfer process. This allows for the seller to save money and the buyer to get the house much sooner. Likewise, the Accord Project has been working on developing an ecosystem and open-source tools for smart legal contracts. [8] The Cicero Templating System, a subsect of the Accord Project, opens the door to people that are not versed in programming to create and format reusable templates for a variety of different contracts. Overall, the possibilities are endless, and as smart contracts become more well known, their use and applicability will spread.
Are Smart Contracts Enforceable?
Absolutely. The enforceability, interpretation, and governance of contracts fall under state laws. Core principles apply across the country, but there are nuances from state to state. As mentioned at the beginning, common law of contracts requires an offer, acceptance, and consideration to be satisfied. Generally, as long as it can be shown that smart contracts can satisfy those three elements, then smart contracts can be recognized as legally binding and enforceable in the court of law.
Final Takeaway
As technology advances, so must a person’s ability to adapt. As with any comprehensively digital tool designed by people, there is room for human error. Smart contracts, despite their name, are still programmed and written by humans – and just because they are transparent and secure, does not mean they are not without flaw. As we continue to find the balance between the online world and the real world, whether that is in the form of a hybrid work model or something else, we must make smart choices and deliberate actions.
[1] Janet Pogue McLaurin and Tim Pittman, Across the Globe, Workers Want a Hybrid Work Model, Gensler (Oct. 1, 2021), https://www.gensler.com/blog/across-the-globe-workers-want-a-hybrid-work-model.
[2] Zeus Kerravala, Hybrid Work Brings Happiness as Well as Higher Productivity, SiliconAngle (May 12, 2021), https://siliconangle.com/2021/05/12/hybrid-work-brings-happiness-well-higher-productivity/.
[3] What is Blockchain Technology?, CBInsights (Aug. 20, 2020), https://www.cbinsights.com/research/what-is-blockchain-technology/.
[4] Mike Jenkins, Nick Szabo: One of Crypto’s Founding Fathers,CoinBureau, https://www.coinbureau.com/analysis/who-is-nick-szabo/.
[5] Nick Szabo, the Man Behind Smart Contracts and More, Brickken (Jan 10, 2021), https://www.brickken.com/blog-nick-szabo/.
[6] Gas and Fees, Ethereum (Sep. 29, 2021), https://ethereum.org/en/developers/docs/gas/.
[7] Stuart D. Levi and Alex B. Lipton, An Introduction to Smart Contracts and Their Potential and Inherent Limitations, Harvard Law School Forum on Corporate Governance (may 26, 2021), https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/.
[8] What is the Accord Project, Accord (Oct. 2, 2021), https://accordproject.org/about/.
About the author:
Natalie Elizaroff is a 3L at UIC School of Law, recently renamed from the John Marshall Law School. She is the Candidacy Editor of the Review of Intellectual Property Law, President of the Intellectual Property Law Society, and Treasurer of the Video Game Law Society. Prior to law school, Natalie graduated with a B.S. in Molecular Biology from Loyola University Chicago. Natalie currently works as a Law Clerk with Advitam IP, handling trademark litigation, patents, and other IP-related matters.