Conceptualizing Smart Contracts

Conceptualizing Smart Contracts

Stanford Law Workshop Computable Contracts

Aaron WrightCardozo Law School

January 21, 2016

What’s a blockchain?

Database maintained by a network of computers.

It’s not owned by any one entity or person. It’s collectively managed by a peer-to-peer network through software.

Data about transactions are stored in a series of “blocks” which are organized in a sequential “chain.”

Enables transactions involving that data to be processed and validated in a way that does not require parties on the network to trust one another

Why do blockchains matter?

Secure

Traceable

More Resilient Data

Self-executing

New part of the Internet stack

“Decentralised systems, such as the blockchain protocol, threaten to disintermediate almost every process in financial services”

What can I do with a blockchain?

Virtual Currencies

Manage access to records with greater certainty and security

Build Self-Executing “Smart” Contracts

What is a “Smart Contract”?

Use of code and a blockchain to execute logic if certain conditions are met.

Universe of Smart Contracts

Legal Code


LegalCode Group Rules



LegalCode

GroupRules

Device Interactions


Device Interactions

LegalCode

GroupRules

Legal Code

Code → less ambiguous than wordsSelf-executing → harder to breach

Group Rules

Digital Identities & Signatures

E-Voting*

*where public voting is not a concern

Uncertificated Digital Securities

With identity, voting records, securities, you can begin to use smart contracts to digitize corporate/LLC formations, equity allocation, and distributions

Device Interactions

Easier for machines to process code, as opposed to human readable language

Easier to enter into commercial arrangements using a virtual currency, as opposed to traditional hand-to-hand currency

Machines arguably need greater degree of precision

What smart contracts are being built?

LEGAL CODE

Securities

Derivatives

Capital Markets

Exchanges & Markets

Music Licensing and Royalty Payments

GROUP RULES

DEVICE INTERACTIONS

GROUP RULES

AUTONOMOUS “LAWLESS”CONTRACTS

What are limitations/problems with smart contracts?

#1 Self-Enforcement

• Unless provided for in the code, smart contracts lack the ability to be breached and can be hard to amend

• Code immutably binds parties/devices without leaving them the possibility of unwinding the agreement, by virtue of nature of smart contract

• Challenging questions for machine-to-machine commerce and legal code and unintended consequences

#2 Enforceability

• Courts have not yet affirmed the enforceability of legal code

• Without absolute certainty, risk averse parties may be justifiably reluctant to enter into such agreements

• Questions of agency with machines and devices—i.e., manufacturer or owners

Will need to back-up any legal code with a human-readable version or wrapper (known in financial cryptography circles as a “Ricardian Contract”)

#3 Privacy

• Blockchains/smart contracts are semi-private

• Raises challenges for use cases, where privacy can be a valuable

• Be careful when storing sensitive information on a blockchain

#4 Autonomy

• Smart contracts, on systems like Ethereum, can run autonomously without human intervention, becoming hard to stop

• They are viral in nature, which raises questions as to what intermediaries will be able to be leveraged to halt their execution (miners, information intermediaries, and/or programmers).

Thanks!

[email protected]@awrigh01

Conceptualizing Smart Contracts

Technology