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

Universe of Smart Contracts

LegalCode Group Rules

Universe of Smart Contracts

Universe of Smart Contracts

LegalCode

GroupRules

Device Interactions

Universe of Smart Contracts

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!

aaron.wright@yu.edu@awrigh01