What makes a ‘Smart Contract’ smart?

One of the applications that have come from the surge in research around blockchain is the idea of a ‘smart contract’. The core purpose of a smart contract is to automate obligations which are held as code. Lawrence Lessig notably stated that “code is law”(Code Version 2.0, Lawrence Lessig, Basic Books, 2006). Code is essentially a set of rules or instructions, much like the law. 

The impact this automation would have on lawyers could be significant. Law firms are already striving for better efficiency to reduce costs and streamline workflows. The beginning of this process starts with designing a consensus agreed template code language, which will allow firms globally to have a standard when creating contracts.

Lexis®PSL subscribers can enjoy expert guidance on numerous topics, such as this one. If you are not a subscriber, you can take a free trial of Lexis®PSL here.

A component breakdown of what a Smart Contract can do

There is no clear definition when it comes to what a smart contract is. At the start of their inception, smart contracts have been limited to software architects and web developers creating the rules and validation. John Stark in his articleMaking Sense of Blockchain Smart Contracts outlines the two different ways that the term ‘Smart Contract’ is understood:

1. The first is entirely operational or transactional. This involves the execution of software agents, typically like blockchain but not necessarily on a shared ledger. The word ‘contract’ in this sense indicates that these software agents are executing certain rules or obligations and may take control of certain assets within the shared ledger. Stark renames these agents as ‘smart contract code’.
2. The second focuses on how legal contracts can be expressed and executed in software. This therefore encompasses operational aspects, issues relating to how legal contracts are written and how the legal prose should be interpreted. There are several ideas and projects which focus on these aspects. Stark refers to this concept as ‘smart legal contracts’.

Smart Contract Code (transactional – code rules)

Smart contracts could be built on a pseudo code of “If” and “Then” statements. I have taken an example and created a pseudo code format for a Call Option Agreement from LexisPSL.

S2.1 “Option”:

In consideration of the payment of £[insert figure] by the Buyer to the Seller, the Seller grants the Buyer an option to purchase the Call Option Shares subject to the terms, conditions and provisions set out in this agreement (the Call Option).

 S2.1 “Option” In a pseudo code format:

{<1.1