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Legal Tech: What are Smart ‘Legal’ Contracts?

Many people think of blockchain as the technology that only powers Bitcoin and other cryptocurrencies. Blockchain has far more capability than just the creation of digital currency, it can be used to programme and record any data of value including financial transactions, medical records, proprietary titles and more. A potentially popular use of blockchain (aside from cryptocurrency) is Smart ‘Legal’ Contracts.

 

 

First things first – What is blockchain

Blockchain seems complicated, and it can be, but the main concept is quite simple. Blockchain is a collection of information that is stored electronically on a network of computers. Blockchain is often compared to a database or a general financial ledger.  The main difference between a blockchain and a database is that a blockchain collects information together in groups (or blocks) that hold sets of information and is decentralised and so not controlled by a single entity. Whereas as a database is centralised and (usually) controlled by a single entity.

On a blockchain, the information is saved in a particular format (such as HTML, or ‘Trie’ structures which are similar to tree like data structures) although this can change for each separate blockchain application. The blocks have a limited storage capacity (for instance, a block on the Bitcoin blockchain is only 1Mb in size – not even a downloaded song!), and once storage is filled, another block will be created and metaphorically chained in a chronological fashion onto the previously filled block. This, therefore, forms the chain of data the name ‘blockchain’. Blockchains can be private or public or even a mix of both. Interestingly, the entire blockchain that makes up Bitcoin is only 331 GB which is easily the size of a high end laptop hard drive. 

So, what is so special about the blockchain?

When a change is made to a particular block, the data within that block isn’t overwritten, instead, the change is stored in a new block added to the end of the chain. This block will detail the data that has been changed, what it has been changed into, as well as the precise date and time. This non-destructive tracking of data allows users to trace any changes in the blockchain. It is this type of recording that leads to the comparison to financial ledgers. See our animation below of how this works. You might ask whether the data can simply be changed. The answer is in principle no, because in changes to the blockchain have to be verified by the numerous computers within the networks (see below). 

One of the words often coupled with blockchain is ‘decentralised’. Put simply, there is no central holder of the information, the data is distributed across a large network of computers. One of the reasons behind creating the blockchain in the first place is the decentralised nature of it means there is no centralised government type control but whether that continues might be up for debate. Complex mathematics (performed by computers) and numerous verifications completed across these computers create trust in the blockchain, as blocks cannot just be ‘added’ without going through the verification process.

Where is the blockchain? 

The word distributed in terms of technology originally referred to computer networks where individual computers were physically distributed within some geographical area. The question that blockchain aficionado’s sometimes fail to address is, where are these computers? Realistically, there aren’t many options. Either the computers are located in different locations (such as home offices, basements, teenagers gaming rooms…), or they’re located in one central location together (such as a data centre). Either way, this does cast some doubt as to the security of the computers and the blockchain itself. Some risks include the programming code used as well as what is known as end point vulnerabilities which can simply mean the point at which the blockchain is accessed.

How and who creates blockchain?

Blockchain itself was invented by a person (or group of people – no one knows!) using the name Satoshi Nakamoto in 2008 to serve as the public transaction ledger of Bitcoin. The identity of Satoshi Nakamoto remains unknown to date, however his (or their) creation of blockchain inspired other applications and blockchains which are now widely used.

Blockchains will generally be created by experienced coders and programmers, however if you were to go about creating a smart contract you can actually now find blockchains pre-made online, like you would find an app. These blockchains are generally created by experienced coders and programmers, such as the coders behind Ethereum blockchain and cryptocurrency. Ethereum blockchain is now popular for use in creating smart contracts, and can be used online through the application ‘Ganache‘, known as a ‘one click’, closed network blockchain. You can also create your own blockchain from scratch, however you will need a team of highly experienced coders in order to do so.

how does this relate to smart contracts?

A common mistake that is made when we hear ‘smart contracts’ is we think of contracts in the legal sense. Whilst smart legal contracts are likely to become widespread sooner than later, a smart contract is a computer protocol (or process), which can be based on blockchain technology, intended to digitally facilitate, verify or enforce the negotiation, agreement to and performance of a contract.  This allows the performance of credible transactions without the need for third parties and middlemen (such as lawyers!), saving time and reducing the potential for disputes. Smart contracts already exist in the form of If This Then That (ITTT) technology.

Smart contracts were first ”created’ in 1994 by Nick Szabo who determined that contracts could be converted into computer code, stored and replicated on a system supervised by a network of computers that run the blockchain. This could also be used to trigger ‘ledger feedback’, such as receiving a product or service, or the transfer of money. Anything of value may be transferred using smart contracts, such as money, property or shares.

A helpful metaphor to illustrate how a smart contract might work is the comparison to a vending machine, as described by Nick Szabo, and which we describe below. With the right inputs, a certain output is guaranteed. A smart contract, like a vending machine, will have predetermined pathways programmed into it. Smart contracts automatically enforce themselves once certain conditions are met.  Again, this can be compared to If This Then That (IFTT)  technology, a service that allows a user to program a response to an event. Similarly, as a vending machine removes the need for a human operating a till taking your money for the purchase and so smart contracts (theoretically) can remove the need for middlemen and any other go-between.

 

 

Let’s take a look at this through a practical example:

You walk up to a vending machine and would like to buy a chocolate bar. The vending machine shows you that a chocolate bar is 1.50p. You misread the price and insert 0.50p and select the code for the chocolate bar. The vending machine will recognise that although you have inserted money and selected a code there is not enough money to complete the contract. The vending machine therefore will not give you the chocolate bar. You realise this and insert the £1 and select the code again. The vending machine recognises that you have inserted the correct amount, and dispenses your chocolate.

money + code for snack selection = snack dispensed.

Compare this to a smart contract. A simple example could be one of life insurance. The policy terms would be encoded into the contract and, in the event of a death, a notarised death certificate would be provided as the input to trigger the ledger feedback which results in payment to the named beneficiaries. If a non-notarised death certificate or the wrong document is provided, the smart contract will not execute the payment.

monthly policy payment + notarised death certificate = payment released.

This is just a simplified example of what smart contracts could do.

Any examples of smart contracts actually in use?

Cryptokitties is a blockchain game on the Ethereum network developed to allow users to purchase, collect and breed virtual cats. Whilst this appears to be unusual, it is one of the earliest attempts to use blockchain technology for recreation and leisure. Every cat in the game is entirely unique, and can actually be sold as a non-fungible token (NFT – we’ll get on to these in a later blog!) for prices exceeding $300,000 US dollars.

Cryptokitties ownership is tracked via a smart contract on the Ethereum blockchain. The ‘kitties’ are distributed automatically, via a smart contract, at the rate of one every 15 minutes (672 per week) for one year.

How and who creates smart contracts?

Simple smart contracts can be created by anyone with some knowledge of coding and blockchain, especially now that the resources to create them can be found online.

Smart legal contracts will involve more input due to the legal implications of their use and purpose as their use can still give rise to a dispute. Currently, there is no such one methodology for creating smart legal contracts, and building applications for blockchain is an overwhelming and impossible task for non-developers.

Smart legal contracts are made up of many layers, that being the blockchain network, the web and coding interface, the application storage and contract manager, and the user interface (the app if you like). A smart legal contract development team will be made up of developers, lawyers, and contract managers (who will be in charge of using and managing the smart contract interface) all aiming to ensure the final product is fit for purpose.

We are yet to see a smart legal contract come to fruition but it is likely that they will be the future, with the UK Jurisdiction Taskforce releasing arbitration rules pre-empting disputes that may arise from their development.

Why blockchain and smart ‘LEGAL’ contracts?

Why not just stick to what we know? Stripping away all of the hype, blockchain has a real potential to revolutionise the technology and data sector in the same way that Big Data has in recent years.

  • Blockchain provides a history of activity, not just a snapshot in time as a database might. It maintains an accessible record (that can be public or private) of all information that existed before, regardless if it has changed.
  • Blockchain has no one, central point of attack. The fact that it is decentralised method of storage in itself makes it secure – there is no single point of entry for hackers. With more and more of our lives moving online, this is a huge positive for ensuring data is recorded securely.
  • There is no centralised control. As the system is decentralised and replicated in its entirety in multiple places, there is no need for a central administrator and the costs and infrastructure that comes with it.
  • An International Monetary Fund staff discussion reported that smart contracts based on blockchain technology might reduce moral hazards and optimise the use of contracts in general. 
  • Smart legal contracts can be utilised digitally, with an online interface (an app) being the deciding factor of whether a contract has been executed or not (rather than physical contracts and signed counterparts). 

The future and POSSIBLE APPLICATIONS

Principally, as we are lawyers, we see real application in using smart legal contracts for our clients, particularly where there are problems with having people sign in person a contract for employment say. With the right team, we know that smart legal contracts have have a real impact in the legal industry, and it is only a matter of time before we see them being utilised.

The future is here and we are working on our own projects to roll out smart contracts for clients. If you want to discuss how we might help you do this, please do get in touch.

 

Many people think of blockchain as the technology that only powers Bitcoin and other cryptocurrencies. Blockchain has far more capability than just the creation of digital currency, it can be used to programme and record any data of value including financial transactions, medical records, proprietary titles and more. A potentially popular use of blockchain (aside from cryptocurrency) is Smart ‘Legal’ Contracts.

 

 

First things first – What is blockchain

Blockchain seems complicated, and it can be, but the main concept is quite simple. Blockchain is a collection of information that is stored electronically on a network of computers. Blockchain is often compared to a database or a general financial ledger.  The main difference between a blockchain and a database is that a blockchain collects information together in groups (or blocks) that hold sets of information and is decentralised and so not controlled by a single entity. Whereas as a database is centralised and (usually) controlled by a single entity.

On a blockchain, the information is saved in a particular format (such as HTML, or ‘Trie’ structures which are similar to tree like data structures) although this can change for each separate blockchain application. The blocks have a limited storage capacity (for instance, a block on the Bitcoin blockchain is only 1Mb in size – not even a downloaded song!), and once storage is filled, another block will be created and metaphorically chained in a chronological fashion onto the previously filled block. This, therefore, forms the chain of data the name ‘blockchain’. Blockchains can be private or public or even a mix of both. Interestingly, the entire blockchain that makes up Bitcoin is only 331 GB which is easily the size of a high end laptop hard drive. 

So, what is so special about the blockchain?

When a change is made to a particular block, the data within that block isn’t overwritten, instead, the change is stored in a new block added to the end of the chain. This block will detail the data that has been changed, what it has been changed into, as well as the precise date and time. This non-destructive tracking of data allows users to trace any changes in the blockchain. It is this type of recording that leads to the comparison to financial ledgers. See our animation below of how this works. You might ask whether the data can simply be changed. The answer is in principle no, because in changes to the blockchain have to be verified by the numerous computers within the networks (see below). 

One of the words often coupled with blockchain is ‘decentralised’. Put simply, there is no central holder of the information, the data is distributed across a large network of computers. One of the reasons behind creating the blockchain in the first place is the decentralised nature of it means there is no centralised government type control but whether that continues might be up for debate. Complex mathematics (performed by computers) and numerous verifications completed across these computers create trust in the blockchain, as blocks cannot just be ‘added’ without going through the verification process.

Where is the blockchain? 

The word distributed in terms of technology originally referred to computer networks where individual computers were physically distributed within some geographical area. The question that blockchain aficionado’s sometimes fail to address is, where are these computers? Realistically, there aren’t many options. Either the computers are located in different locations (such as home offices, basements, teenagers gaming rooms…), or they’re located in one central location together (such as a data centre). Either way, this does cast some doubt as to the security of the computers and the blockchain itself. Some risks include the programming code used as well as what is known as end point vulnerabilities which can simply mean the point at which the blockchain is accessed.

How and who creates blockchain?

Blockchain itself was invented by a person (or group of people – no one knows!) using the name Satoshi Nakamoto in 2008 to serve as the public transaction ledger of Bitcoin. The identity of Satoshi Nakamoto remains unknown to date, however his (or their) creation of blockchain inspired other applications and blockchains which are now widely used.

Blockchains will generally be created by experienced coders and programmers, however if you were to go about creating a smart contract you can actually now find blockchains pre-made online, like you would find an app. These blockchains are generally created by experienced coders and programmers, such as the coders behind Ethereum blockchain and cryptocurrency. Ethereum blockchain is now popular for use in creating smart contracts, and can be used online through the application ‘Ganache‘, known as a ‘one click’, closed network blockchain. You can also create your own blockchain from scratch, however you will need a team of highly experienced coders in order to do so.

how does this relate to smart contracts?

A common mistake that is made when we hear ‘smart contracts’ is we think of contracts in the legal sense. Whilst smart legal contracts are likely to become widespread sooner than later, a smart contract is a computer protocol (or process), which can be based on blockchain technology, intended to digitally facilitate, verify or enforce the negotiation, agreement to and performance of a contract.  This allows the performance of credible transactions without the need for third parties and middlemen (such as lawyers!), saving time and reducing the potential for disputes. Smart contracts already exist in the form of If This Then That (ITTT) technology.

Smart contracts were first ”created’ in 1994 by Nick Szabo who determined that contracts could be converted into computer code, stored and replicated on a system supervised by a network of computers that run the blockchain. This could also be used to trigger ‘ledger feedback’, such as receiving a product or service, or the transfer of money. Anything of value may be transferred using smart contracts, such as money, property or shares.

A helpful metaphor to illustrate how a smart contract might work is the comparison to a vending machine, as described by Nick Szabo, and which we describe below. With the right inputs, a certain output is guaranteed. A smart contract, like a vending machine, will have predetermined pathways programmed into it. Smart contracts automatically enforce themselves once certain conditions are met.  Again, this can be compared to If This Then That (IFTT)  technology, a service that allows a user to program a response to an event. Similarly, as a vending machine removes the need for a human operating a till taking your money for the purchase and so smart contracts (theoretically) can remove the need for middlemen and any other go-between.

 

 

Let’s take a look at this through a practical example:

You walk up to a vending machine and would like to buy a chocolate bar. The vending machine shows you that a chocolate bar is 1.50p. You misread the price and insert 0.50p and select the code for the chocolate bar. The vending machine will recognise that although you have inserted money and selected a code there is not enough money to complete the contract. The vending machine therefore will not give you the chocolate bar. You realise this and insert the £1 and select the code again. The vending machine recognises that you have inserted the correct amount, and dispenses your chocolate.

money + code for snack selection = snack dispensed.

Compare this to a smart contract. A simple example could be one of life insurance. The policy terms would be encoded into the contract and, in the event of a death, a notarised death certificate would be provided as the input to trigger the ledger feedback which results in payment to the named beneficiaries. If a non-notarised death certificate or the wrong document is provided, the smart contract will not execute the payment.

monthly policy payment + notarised death certificate = payment released.

This is just a simplified example of what smart contracts could do.

Any examples of smart contracts actually in use?

Cryptokitties is a blockchain game on the Ethereum network developed to allow users to purchase, collect and breed virtual cats. Whilst this appears to be unusual, it is one of the earliest attempts to use blockchain technology for recreation and leisure. Every cat in the game is entirely unique, and can actually be sold as a non-fungible token (NFT – we’ll get on to these in a later blog!) for prices exceeding $300,000 US dollars.

Cryptokitties ownership is tracked via a smart contract on the Ethereum blockchain. The ‘kitties’ are distributed automatically, via a smart contract, at the rate of one every 15 minutes (672 per week) for one year.

How and who creates smart contracts?

Simple smart contracts can be created by anyone with some knowledge of coding and blockchain, especially now that the resources to create them can be found online.

Smart legal contracts will involve more input due to the legal implications of their use and purpose as their use can still give rise to a dispute. Currently, there is no such one methodology for creating smart legal contracts, and building applications for blockchain is an overwhelming and impossible task for non-developers.

Smart legal contracts are made up of many layers, that being the blockchain network, the web and coding interface, the application storage and contract manager, and the user interface (the app if you like). A smart legal contract development team will be made up of developers, lawyers, and contract managers (who will be in charge of using and managing the smart contract interface) all aiming to ensure the final product is fit for purpose.

We are yet to see a smart legal contract come to fruition but it is likely that they will be the future, with the UK Jurisdiction Taskforce releasing arbitration rules pre-empting disputes that may arise from their development.

Why blockchain and smart ‘LEGAL’ contracts?

Why not just stick to what we know? Stripping away all of the hype, blockchain has a real potential to revolutionise the technology and data sector in the same way that Big Data has in recent years.

  • Blockchain provides a history of activity, not just a snapshot in time as a database might. It maintains an accessible record (that can be public or private) of all information that existed before, regardless if it has changed.
  • Blockchain has no one, central point of attack. The fact that it is decentralised method of storage in itself makes it secure – there is no single point of entry for hackers. With more and more of our lives moving online, this is a huge positive for ensuring data is recorded securely.
  • There is no centralised control. As the system is decentralised and replicated in its entirety in multiple places, there is no need for a central administrator and the costs and infrastructure that comes with it.
  • An International Monetary Fund staff discussion reported that smart contracts based on blockchain technology might reduce moral hazards and optimise the use of contracts in general. 
  • Smart legal contracts can be utilised digitally, with an online interface (an app) being the deciding factor of whether a contract has been executed or not (rather than physical contracts and signed counterparts). 

The future and POSSIBLE APPLICATIONS

Principally, as we are lawyers, we see real application in using smart legal contracts for our clients, particularly where there are problems with having people sign in person a contract for employment say. With the right team, we know that smart legal contracts have have a real impact in the legal industry, and it is only a matter of time before we see them being utilised.

The future is here and we are working on our own projects to roll out smart contracts for clients. If you want to discuss how we might help you do this, please do get in touch.

 

Need advice?

If you’d like further information, please get in touch