Dreams of an unregulated, decentralized contractual framework are based on a shallow understanding of human society and state structures.
This is the first out of three entries in our ‘Smart Contract’ series.
The crypto-bubble had taken the world by storm a year ago, and today, it has arguably burst. As far as the tech media is concerned, it has two successors: Smart Contracts and Blockchain, both of which have been branded by tech gurus as potential game-changers that will revolutionize the field. They predict that this revolution will minimize the role of the state and legal systems in contractual transactions, and give rise to a financial world based on autonomy and independence.
In this three-part series on Smart Contracts, I will attempt to prove that this panorama of decentralization, trustless systems, and freedom that has been painted is at best surreal, and may even be misleading. In support of this claim, I will advance two socio-legal arguments: first, there are practical issues of feasibility which can only be resolved by state support; and second, an even stronger state and legal system will be needed to ensure security while also giving rise to potential issues of privacy.
Before these arguments are detailed, it is crucial to understand how smart contracts work.
Smart Contracts can be described as self-executing, self-contained contracts which do not require human intervention. They are a function of coded systems and require only an initial human input. One oft-cited example of a primitive smart contract is that of the vending machine, which, upon initial input by a human automatically executes the contract. But there was a problem with taking these primitive smart contracts to a grander scale: the digital existence of real-life assets. Without being able to transfer assets digitally, widespread use of smart contracts could not have been realized. Since the creation of Blockchain, however, this has changed.
Blockchain is a decentralized digital ledger. Every transaction or exchange within the Blockchain is verified by potentially millions of systems. This imparts it with the unique ability to store information which cannot be altered or modified by any single person. Thus, it gives sharing of information two important features: trust and ease. This framework is supported by the Internet of Things (IoT), the premise of which is that all physical objects can be controlled using information technology. In consonance, blockchain and IoT have made smart contracts a reality.
Now, when one wants to sell his house he can create a smart contract offer. This can be put on a Blockchain enabled platform. Upon acceptance by a buyer, a code for the IoT-enabled digital lock to the house will be shared to the buyer and money from the buyer’s account will automatically be transferred to the seller. This transaction will be verified by the Blockchain system and hence, no party can renege on their promise. Thus, without any actual human intervention, a contract can be executed. This will lead to immense economic benefits by reducing transaction cost to a huge extent.
The arguments can be found in the the following entries of this series.