What exactly are smart contracts, and how might they impact your business? Smart contracts are self-executing contracts, with the terms of the agreement directly written into lines of code. The code, and the agreements contained within it, exist across a blockchain network.
Smart contracts were first proposed in 1994 by Nick Szabo. In 1998, he invented a virtual currency called ‘Bit Gold’ – a full 10 years before the invention of bitcoin. Importantly, smart contracts permit the facilitation of trusted transactions and agreements without the need for a central authority, legal system, or any other external mechanism. As a result, these transactions are traceable, transparent and irreversible.
Twenty-four years later and the opportunity for smart contracts is starting to emerge. In fact, Gartner estimates that by 2022, 25% of global companies will use certain smart contracts.
French insurance company AXA is using blockchain technology to offer flight delay insurance via an app called Fizzy. If your flight is more than two hours late, and your airline details are loaded into the app, you’ll automatically be notified with compensation options.
Once you’ve made a choice, the money is sent directly to your credit card. This use of smart contracts is based on parametric insurance, in which users are not compensated for total loss, but loss outside the traditional rules of insurance. The insurance is based on a triggering event. In this instance, the event is the flight being more than two hours late.
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Meanwhile, Propy, which describes itself as the world’s first international real estate marketplace, allows buyers, sellers and all other parties to do business through smart contracts. For example, an interested buyer can reserve a property by paying a set amount to the escrow company currently holding it. Thanks to the terms of the smart contract, the buyer will get that money back if the seller refuses to sell the property. All paperwork and signatures are facilitated remotely, through the app, making it easy to buy and sell property, regardless of where you live.
There’s no doubt that blockchain technology and smart contracts will have a huge impact on the redistribution of power and wealth. Most industries will feel the effects in one way or another. The legal fraternity, in particular, will be turned on its head. But will smart contracts rid the world of lawyers entirely? The answer is no.
Why? Well, first and foremost, someone needs to create the contract terms. Also, a large part of a corporate lawyer’s job is custom contract drafting. Larger deals will always require bespoke legal services rather than a one-size-fits-all approach. It’s also worth noting that since the blockchain is permanent, smart contracts that are not programmed for pre-established modifications could be difficult to amend.
Finally, it’s important to remember that the value of a lawyer isn’t in the contract they write – it’s in the legal advice they provide. This advice is specifically tailored to each client’s individual circumstances.
It’s important to note that smart contracts come with their own set of risks. In 2016, a digital investing organisation called The DAO was hacked due to a vulnerability in its foundational smart contract. The hacker took off with more than $50 million. The problem was not the Ethereum blockchain supporting The DAO, but the code of the smart contract framing the organisation. In short, the smart contract was written in such a way that made The DAO vulnerable to hackers.
There’s no denying that smart contracts will have a wide-reaching impact. What’s more interesting is how smart contracts will be implemented. For example, it’s likely that we will move to a world where smart contracts are a combination of paper and digital content, whereby contracts are verified and executed via blockchain and substantiated by hard copy, and yet still digitally signed.