Smart Contracts are a Future

Jeffrey Glazer
September 14, 2015

People like to say "such and such is the future of the law." I happen to believe that "the law" is not "a thing." There are numerous laws - just ask a Public Defender to write an Operating Agreeement, or a patent lawyer to write a will, you'll see what I mean.

 

It's a cliche to say, but technology is changing the practice of law. For you senior partners, just recall the integration of computers into the workplace. For you managing and active partners, you'll recall the introduction of online research. For senior associates think abou the social media revolution and how that has changed not only marketing, but client communication. For new associates, well, you don't get paid to think - just finish your assignment and get that brief to Janet.

 

Technology is already playing a role in access to legal services. Skype enables access to lawyers for clients in rural areas. Services like UpCounsel can find you an expert anywhere in the country. It is also playing a role in the performance of legal services - from online research to cloud-based practice and document management. Every courtroom is now equipped with multiple computers for everything from docket management to displaying evidence. 

 

So far, though, technology has largely been used to bring lawyering into the 21st century. Being a lawyer today from a practice perspective is still functionally identical to being a lawyer in the 90's, 80's, 70's, 60's, 50's, 40's, 30's, 20's, etc. etc. The practice of law itself has not been fundamentally changed by technology in the way that, say, advanced manufacturing has completely restructed production of goods. People who cut dies are no longer high school dropouts - they are college-trained computer and manufacturing engineers programming advanced robotics. Not to mention cloud-storage being the "killer app" to tree-based document production.

 

Smart contracts are going to start the re-invention of the practice of law in the same way that robotics has redefined manufacturing. It won't be better or worse, but it will be different - and it will require very different skills.

 

What is a "smart contract"? A smart contract is a set of "computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract." It is not only a contract that is self-enabling, but it is self-enforcing. We already deal with some smart contracts in our every day lives - think about iTunes and the music you "purchase" from iTunes. As you are aware, that "purchase" is not a "purchase" at all, but a license from Apple to use a music file that contains a bit of music on it; you may use it subject to some terms - for example, you can only download and play it on up to 5-7 Apple devices. There is a bit of code embedded into every music file that checks how many different devices it has been downloaded to and whether those devices are Apple devices - if either test fails, you can't play your music. That license is self-enforcing - it doesn't need a lawyer at your house to audit where you download it and what kind of devices you play your music on.

 

In one of the earliest papers on smart contracts (1997), Nick Szabo (himself an enigma wrapped in a puzzle) describes another such smart contract: A car loan. In his hypothetical, he describes the contract as such: a consumer gets a car loan that requires repayment for a term and is secured by the car. At the time of the loan a lock is installed on the car and lock is programmed to do the following: 1) let in the owner but exclude third parties; 2) a second opening option for the creditor; 3) the creditor option is only turned on if the borrower fails to pay for some period of time; 4) upon final payment of the loan, the creditor option is disabled. Again, we have a self-enabling and self-enforcing contract. While it would require sophisticated electronics (verified that it only does what it says it will do and cannot be hacked), it requires nothing more than the technology to enforce the contract.

 

The parenthetical caveat to that hypothetical, while an aside, is probably the most important part of the sentence. Without security (technological, not legal security) to prevent hacking the contract cannot be self-enforcing. Without technology to truly and unmistakably verify the participants and the payments, the contract cannot be trusted. While it would be hubris to suggest that those problems are "solved" (they aren't), it would certainly be true to suggest that they are very close to being solved. 

 

Without getting into too much detail, the technology that underlies Bitcoin (itself, possibly, maybe, invented by Szabo), called the blockchain, might form the basis for solving the verification and security of smart contracts. New technologies, like Ethereum, are making this a reality. Originally, this was going to be the whole centerpiece of this article. But, I see I'm running long, so I'll cut it short here and just say that I'll describe how Ethereum works and its potential applications in a later post.