Posted on Categories blockchain

Smart contracts in practice

Smart contracts are no longer just a theoretical concept and are becoming a real tool used by lawyers (with some help from developers…).

In everyday practice, lawyers use methods and tools whose history dates back hundreds or even thousands of years. The history of written law is also the story of the development of ways in which it is interpreted and applied.

The tools used by lawyers to create, interpret and apply laws also have a long history. Even though the impressive volumes of law books which lined legal offices for decades have largely been replaced by online databases, the way in which lawyers work has not radically changed in recent years.

Revolution at the gates

However, it appears that the next few years will bring revolutionary changes to the practice of law. Lawyers, of course, will find themselves in the eye of this storm and the coming shifts may dramatically alter their profession.

Unsurprisingly, technology will be the driving force behind these changes. It seems that two technological trends will be particularly relevant: the growth of artificial intelligence (AI) and blockchains.

For now, the expectations surrounding these new technologies far surpass their current capabilities. We may have to wait quite some time until courts get replaced by AI algorithms and legal entities give way to smart contract-based decentralised autonomous organisations (DAOs). But the rapid growth of these technologies is already laying the foundation for a new reality which all lawyers will have to face. For example, AI technology is already able to execute fast and accurate analyses of large databases of documents (particularly significant in jurisdictions where the English legal tradition of precedential court rulings is used). At the same time, smart contracts have become a mechanism for regulating certain relations which had previously been the subject of contracts drawn up by attorneys.

Let’s take a closer look at smart contracts and their application in legal practice.

Practical aspects of smart contracts

While smart contracts are slowly becoming established in legal practice, they are still not a well-known tool. There is still a need for an introduction as to what they are and how they relate to traditional legal concepts. The Blockchain, smart contracts and DAO report published by Wardyński & Partners in October 2016 serves just this purpose.

One of my articles included in the report ‘How to design smart contracts and DAO’ remains highly relevant. We can now also benefit from extensive experience drawn from  practice of creating smart contracts. This experience is derived from my work at a blockchain startup which is developing advanced legaltech structures, as well as from my coordination of smart contract writing seminars organised by the Coalition for Polish Innovation. (Wardyński & Partners is an active participant in the coalition’s work).

So how does creating smart contracts work in practice? Here’s a brief discussion of several relevant topics.

  1. Connecting smart contracts and legal documents

The most interesting projects are not limited to simply adjusting legal documents to reflect smart contracts (or vice-versa), rather they seek to create of cohesive whole from the two. Cross-references, a coordinated updating system and the joint identification of parties are just some of the tasks which can be undertaken to establish an integral structure based on smart contracts and traditional legal solutions.

  1. Questions of supremacy

The question of supremacy in instances where the wording of a legal document and a smart contract’s code differ is one of the most fascinating aspects in this area. Important concerns in such matters include theoretical/legal questions as well as a particular case’s circumstances, this combination makes it difficult to reach simple conclusions in these matters. In practice, these questions should be approached pragmatically – in a way that would allow an impartial observer to easily determine the steps to be taken in instances of conflict between the smart contract code and the text of the agreement.

  1. Role of smart contracts

Lawyers should not attempt to reduce smart contracts to civil-law agreements. A smart contract is a computer program which may have a number of different applications. Should a project include a legal component, the lawyer should address the question of the smart contract’s role and its legal significance.

  1. Impact of regulation

The use of smart contracts does not exclude the applicability of regulations including: financial, personal data protection and others. This is one reason why lawyers need to be involved in the creation of smart contracts starting at the preliminary design stage.

  1. Security

Each month brings news of smart contract errors which result in significant loss of assets. The potential for legal and coding errors is further increased in hybrid structures which include traditional legal components. The appearance of these errors must be planned for and remedial measures should be prepared ahead of time.

  1. Audits

The blockchain world knows that smart contracts should be subjected to strict audits. This is even more true for projects which combine smart contracts with traditional legal components. This remains a significant challenge as there is a lack of professionals who have the ability to carry out such audits. This raises the possibility of future collaborations between law firms and technology companies specialising in cybersecurity.

The above are just some of the issues arising at the nexus of smart contracts and the legal profession. We will return to other areas of this subject in future blog posts.

Jacek Czarnecki