Could Blockchain-based smart contracts eventually replace lawyers?
Self-aware blockchains can monitor compliance and avoid disputes – but there is a catch.
They won’t replace lawyers completely, but blockchain-based smart contracts are moving towards broader usage as increasingly sophisticated companies embrace blockchain for everything from supply-chain enhancements to document archiving, data storage, and managing cryptocurrency-based financial transactions.
Smart contracts were pioneered with the Ethereum cryptocurrency, which complemented the distributed ledger technology popularised in Bitcoin with a scripting language, called Solidity, that allows blockchain operators to define terms that regularly evaluated and act on blockchain data.
If a data element falls outside of the prescribed parameters, automatic actions can be taken – enabling blockchain-based smart contracts to provide a level of intelligence that cannot be matched by conventional paper-based contracts.
Such contracts are ponderous to administer, subject to interpretation and disputes, and may be difficult to enforce because they relate to key performance indicators (KPIs) that may not always be easy to track.
For example, a contract for supply of dairy goods might stipulate that the conditions inside the shipping containers cannot exceed a certain temperature.
A breach of this contractual condition would be hard to enforce using traditional methods, since any spoilage would only be detected once the high temperatures had physically altered the delivered product.
By adding Internet of Things (IoT) temperature sensors to the shipping container and storing their readings in the immutable blockchain, however, the intelligence built in the smart contract would instantly flag the breach and raise appropriate alerts – including, for example, instructing warehousing staff to reject the shipment before it gets to grocery-store shelves.
“Without having a smart contract, it is quite hard to take responsibility when this happens,” explains Joseph Liu, Director of the Monash Blockchain Technology Centre (MBTC), “but with a smart contract it’s easy to trace and find out who is responsible for the mistake.”
Addressing smart contracts’ new legal issues
By standardising data representation in an unalterable blockchain and automatically checking its integrity on an ongoing basis, smart contracts promise to dramatically improve the creation, maintenance, and enforcement of operational supply-chain issues.
They can also facilitate the automatic payment of cryptocurrencies as, for example, milestones are reached in the movement of goods from source to destination.
By 2023, Gartner has predicted, organisations using blockchain smart contracts will boost overall data quality by 50 per cent – but may suffer a 30 per cent decline in data availability because governance frameworks may prevent some or all of the blockchain data from being broadly accessible.
“Smart contracts are important and data and analytics leaders should focus on them because they promise a near certainty of trusted exchange,” notes Gartner Senior Research Director Lydia Clougherty Jones.
“Once deployed, blockchain smart contracts are immutable and irrevocable through nonmodifiable code, which enforces a binding commitment to do or not do something in the future.”
Because it is clearly set out in the blockchain, this binding commitment eliminates uncertainty around the terms and triggers for contract terms – as long as terms are carefully set and agreed upon by both parties to the contract. But this may also create challenges for dispute resolution, should one party later take issue with the execution or results of the contracts.
“Normally after two parties enter into a contract, then later have issues with the terms of the contract you resolve those issues after the fact,” explains Dr Weiping He, a Monash Law Faculty lecturer who has been collaborating with MBTC researchers to explore the legal framework around smart contracts.
Procedural issues, such as deciding who will be the authority to resolve the dispute, will require careful consideration and agreement by all parties involved. And, because blockchain technology’s immutable nature means contractual terms can’t be altered later on, it is especially important for all involved parties to understand the nature of blockchain contracts and how they map to operational business requirements.
“In terms of blockchain,” says Dr He, “all terms are set up front. As a contractual party, it would still be incumbent on you to understand the terms of the contract up front. But if questions are raised, blockchain allows you to check transactional records and review the recorded trail of data – so it provides a considered advantage.”
Towards a better blockchain smart contract
Another frequently cited benefit of smart contracts is their ability to eliminate the need for the human intermediaries – bankers, escrow agents, lawyers and others – that normally manage the terms of contractual relationships and negotiate compensation when those relationships are breached.
“From a legal perspective it’s always about what happens if things go wrong,” Dr He says.
Yet before writing humans out of the picture completely, adopters of blockchain smart contracts need to be careful to ensure that they have both addressed how to handle exceptions, and how to ensure that their trust in the integrity of the system remains intact.
To address these and other issues in the evolving smart-contracts field, the research team at MBTC is working with experts across the spectrum of legal, business and IT expertise to explore opportunities for complementary technologies like artificial intelligence (AI), which can give users of smart contracts an even greater degree of understanding and confidence in the technology’s application.
MBTC security experts are actively engaged in the effort, with Associate Director (Research) Dr Jiangshan Yu among those already identifying security vulnerabilities in existing smart-contract mechanisms.
One recent analysis, for example, identified 16 security vulnerabilities in the Ethereum blockchain that had created potential vulnerabilities, as well as the tools and techniques that companies can use to prevent those vulnerabilities from creating problems.
Through this ongoing process of evaluation and remediation, researchers at MBTC and partner organisations are contributing to the global effort to formalise smart-contract architectures and deploy the systems into operational real-world business processes.
Yet this will take time, with an ongoing effort that also involves consultation with authorities and government overseers to raise potential concerns about the automation of contractual compliance.
Due to the complexity of the smart-contract tools and the myriad legal issues they raise, Yu says security is one of the most critical components for smart contracts..
“Whenever someone wants to transfer new technology, it takes some time,” he explains, “because there are always some new concerns that someone will have that we didn’t already think of.
“But we are now in this process to transfer these technologies into the real world to provide a truly smart contract – and our target is to do this within a few years’ time, because blockchain brings benefits in so many different ways.”