In addition to simple transactions between digital assets, the technology
enables programmable contractual arrangements called ‘smart contracts’. These
contracts are in fact generalised computation taking place in the blockchain,
11
and they provide a form of enforcement that does not presuppose any centralised
authorities such as nation-states, e-commerce market leaders or credit card
companies. Thus, smart contracts are contracts embedded in software code that
include the contractual arrangement, the preconditions that define the contractual responsibilities and the actual execution of the contract.
12
To say that smart contracts are self-enforceable means that the software
executes the contract, e.g. allocates digital assets, autonomously and regardless
of trust between the parties. Payment of the funds is not dependent on
voluntary compliance, nor is it affected by later changes in the position of the
parties (e.g. bankruptcy). Simply put, digital assets are transferred to the smart
contract and later on allocated by the software according to the contractual
obligations. No external monitoring or enforcement is needed and self-execution
functions as conflict prevention. It is even possible to include external data points
to a smart contract, which could be employed for the purposes of obtaining
evidence.
13 For example, we could imagine escrow services, and even dispute
resolution, drafted in the form of a smart contract, where both parties transfer
assets to the programme and after the dispute is resolved a neutral third party
concludes the transactions based on her authority. The lines of code of
the contract could be only changed based on the third party’s decision but the
parties could not revise the code. The legal issue between the parties (e.g. ‘the
sold item never arrived and the buyer requests her money back’) is a factual
circumstance that, if proved true, gives the buyer the right to obtain the money.
We could imagine an interface with the transport company that could provide the
information verifying whether the item was indeed received by the buyer. This
information would then be accessed by the smart contract, which would then
allocate the money depending on the facts. The variations for conflict management purposes, and thus the possibilities for automation, are numerous.
Regardless of the promise of blockchains for self-enforcement, mistakes and
failures at the code level have called attention to governance of the distributed
networks. In June 2016, a decentralised autonomous venture capitalist fund built
on the Ethereum blockchain was hacked, leading to around US$130 million
being stolen.
14 The hack took advantage of a mistake in a single smart contract’s
code but challenged the whole network’s ability to provide governance in conflict
situations. The DAO (decentralised autonomous organisation) hack made visible
the potential of fraud within distributed ledger technologies that were supposed
to be beyond vulnerability. In addition to a multitude of practical questions,
ranging from what happens to the individual investments to finding and punishing the perpetrators, the hack has given rise to more in-depth debates about
governance on the blockchain. Are there legal rights and obligations within the
network and, if so, how would such norms for behaviour be set in a system that
transcends all national borders and escapes state-bound regulation? If, ideally, the
code defines the borders of acceptable behaviour and, by definition, unacceptable
184 New ways forward?
enables programmable contractual arrangements called ‘smart contracts’. These
contracts are in fact generalised computation taking place in the blockchain,
11
and they provide a form of enforcement that does not presuppose any centralised
authorities such as nation-states, e-commerce market leaders or credit card
companies. Thus, smart contracts are contracts embedded in software code that
include the contractual arrangement, the preconditions that define the contractual responsibilities and the actual execution of the contract.
12
To say that smart contracts are self-enforceable means that the software
executes the contract, e.g. allocates digital assets, autonomously and regardless
of trust between the parties. Payment of the funds is not dependent on
voluntary compliance, nor is it affected by later changes in the position of the
parties (e.g. bankruptcy). Simply put, digital assets are transferred to the smart
contract and later on allocated by the software according to the contractual
obligations. No external monitoring or enforcement is needed and self-execution
functions as conflict prevention. It is even possible to include external data points
to a smart contract, which could be employed for the purposes of obtaining
evidence.
13 For example, we could imagine escrow services, and even dispute
resolution, drafted in the form of a smart contract, where both parties transfer
assets to the programme and after the dispute is resolved a neutral third party
concludes the transactions based on her authority. The lines of code of
the contract could be only changed based on the third party’s decision but the
parties could not revise the code. The legal issue between the parties (e.g. ‘the
sold item never arrived and the buyer requests her money back’) is a factual
circumstance that, if proved true, gives the buyer the right to obtain the money.
We could imagine an interface with the transport company that could provide the
information verifying whether the item was indeed received by the buyer. This
information would then be accessed by the smart contract, which would then
allocate the money depending on the facts. The variations for conflict management purposes, and thus the possibilities for automation, are numerous.
Regardless of the promise of blockchains for self-enforcement, mistakes and
failures at the code level have called attention to governance of the distributed
networks. In June 2016, a decentralised autonomous venture capitalist fund built
on the Ethereum blockchain was hacked, leading to around US$130 million
being stolen.
14 The hack took advantage of a mistake in a single smart contract’s
code but challenged the whole network’s ability to provide governance in conflict
situations. The DAO (decentralised autonomous organisation) hack made visible
the potential of fraud within distributed ledger technologies that were supposed
to be beyond vulnerability. In addition to a multitude of practical questions,
ranging from what happens to the individual investments to finding and punishing the perpetrators, the hack has given rise to more in-depth debates about
governance on the blockchain. Are there legal rights and obligations within the
network and, if so, how would such norms for behaviour be set in a system that
transcends all national borders and escapes state-bound regulation? If, ideally, the
code defines the borders of acceptable behaviour and, by definition, unacceptable
184 New ways forward?