Smart Contracts and Blockchain

Because blocks may not be removed, substituted, copied or altered, the blockchain is considered inherently authenticated, secure and immutable.

Smart contracts are self-executing agreements written in code on the blockchain. Parties contract digitally using distributed ledger technology, and agree to certain terms and outcomes to be accomplished by the contract.

The blockchain is well-suited to simple and repetitive contracts, like a series of purchases and payments. There is only one blockchain, but it is accessible from anywhere. The final terms are deployed to the blockchain and distributed throughout the underlying platform. Therefore, the contract may be executed at the same time from various locations and effectiveness can be immediate.

Contract draft terms are deployed to the blockchain. Coding facilitates the review of the draft terms and the sequential revision of contract documents concurrently by parties in the multiple locations. Using the spreadsheet example, draft terms can be instantly viewable, and other parties' responses and counter-terms all immediately logged and viewed digitally.

The smart contract code contained in the blocks renders the contract a set of self-executing and self-enforcing protocols. If A happens, then B occurs. If A does not happen, then C occurs.

As autonomous and automated processes, smart contracts lend themselves well to agreements with clear conditions and repetitive transactions. These contracts may be fairly complex in terms of scope, volume and types of terms and conditions, and number of parties, but the terms must be susceptible to conversion to self-performing code. Payment can be effected digitally via the blockchain using cryptocurrency; payment and receipt would be instantaneous.

As an immutable and secure technology, the blockchain can be used to complete transactions typically requiring a trustee or other centralized authority to authenticate the parties, verify that certain contract terms have been met, and execute certain contract terms, such as transfer of ownership or payment.

For example, an escrow agreement can be formed and implemented on the blockchain by linking blocks of defined conditions to the release of certain payments. Independent verification of the satisfaction of the conditions is not required because the fulfillment of each condition is memorialized or effected by the blockchain. Independent disbursement of funds is not necessary because immediate transfers of cryptocurrency can be effected by the blockchain.

In this manner, smart contracts can facilitate certain types of contracts without an intermediary or trustee, at a faster pace, and at lower transactional costs than those associated with traditional trusted intermediary contracts.

The blockchain forms a permanent, trackable record of both the contract terms and the successful performance or failure of the contract terms. All the parties have access to the blockchain to confirm that contract terms have been met and monitor contract performance directly.

No separate recordkeeping or management process may be required. Blocks are accessible at any time and from any location in their permanent form. No separate method of authentication should be required. This could greatly reduce the cost of contract management, while enhancing and simplifying the administration of a vendor management program.

Note for the self-executing smart contract code, parties must use terms that are clearly defined, have measurable performance metrics or objectives, include concrete steps or conditions, and provide for a series of pre-determined outcomes and results.

For example, the smart escrow contract described above provides that the occurrence of specified triggers automatically and autonomously effect certain pre-determined triggered results. These escrow terms are self-executing and do not require human intervention to verify the occurrence of the triggers or effect the triggered results.

Consider, for example, an entertainment software license. Conceivably, terms governing the development of customizations according to specifications, delivery and/or installation of the software, testing and acceptance, and payments could all be memorialized, verified, and executed by smart contract code.

Traditional but more complex terms may not, however, be susceptible to realization on the blockchain. For example, the software licensee will require certain indemnities for intellectual property infringement and data breach. Determination of whether or not intellectual property infringement has occurred or claims trigger liability are not easily reduced to code. Similarly, apportionment of blame and liability for data breach may require external legal analysis.

Disclaimers of warranties, limitations of liability, indemnities, force majeure, arbitration or other conflict-resolution clauses, and other boilerplate legal terms all pose the same difficulty in this context.

Conclusion

To use the blockchain for smart contracts, the dependencies and contingencies must be expected or reasonably foreseeable. The protocols may be less effective for unlikely or ambiguous events or outcomes or events that require an independent legal determination to be enforced.

The efficacy of smart contracting in the entertainment industry thus depends not just on technical coding and system capabilities. The ability of the parties to foresee and define a set of terms, events, and outcomes is critical to the reduction of the contract to self-executing code. Further, the type or content of the term will impact how or whether or not the term may be suitable for the blockchain.

In the near future, use of the blockchain for smart contracts is likely to proliferate for agreements that are conducive to the technology. For more complex transactions, it will be interesting to see if these contracts will be excluded from the blockchain, effected using a hybrid approach of smart contracts and traditional contracts, or if the technology will ultimately be developed to implement these sorts of terms directly or impact the content of contract terms themselves by developing an alternative set of terms susceptible to reduction to self-executing code.

*****
Paige M. Boshell is a partner at Bradley Arant Boult Cummings LLP in Birmingham, AL. She is an IAPP Fellow of Information Privacy, Certified Information Privacy Professional/US and Certified Information Privacy Manager. She leads the firm's Cybersecurity and Privacy, Digital Services and Electronic Contracting, and Cybersecurity and Financial Privacy teams. She can be reached at [email protected]. This article also appeared in our LJN sister publication, Cybersecurity Law & Strategy.