BEFORE THE BAR | Week 4
This week, meet Jacqueline. She will be discussing the future of smart contracts.
Stay tuned for our next vlog!
Here's the full blog post:
By: Jacqueline Weiss
Today I will be discussing Smart Contracts and how this growing technology will impact the legal field by eliminating the need for attorneys in preparing traditional legal contracts.
First, I would like to define what smart contracts are. Smart contracts are pieces of software that are contained in a computer system that contain rules for negotiating the terms of a contract, software that automatically verifies the contract and executes its agreed terms.
What does this mean in practical terms?
It means that the contract is self-executing on a computer system that enables multiple parties to communicate through a central system. The computers work through a blockchain or network of digital computer programs. The programs are like neurons that connect different computers to each other.
How would smart contracts work in the legal world?
Examples of smart contracts include self-executing contracts that are used in real estate, the automobile business, and even in the securities industry.
- EXAMPLE ONE: If I wanted to lease an apartment in Manhattan, but am away at law school in Albany, NY, I could use a smart contract to have the lease executed without having to see a lease agent, or even travel to the city. I could get on the blockchain software for leasing an apartment. This would involve paying in cryptocurrency. Upon paying for the apartment, I would get a digital entry key that would come at a specified date. If the key didn’t arrive on time, the blockchain would give me a refund. The appropriate apartment lease would be automatically executed on the blockchain that would automatically negotiate the terms of the contract and enforce the contract by entering the names of the parties and its lease terms. In this way, the contract would be self-executing without the need for a middleman, contract or landlord-tenant attorney. Legal Zoom would be the closest example to the use of smart contracts as an existing tool in the legal industry.
- EXAMPLE TWO: A second related example might involve a real estate situation between a buyer and seller of a home. Let’s suppose the Buyer lives in Washington, DC and the Seller lives in Westchester, New York. Furthermore, let’s assume the Buyer doesn’t want to come to New York because he is ahighly paid CPA who can’t leave the DC area during tax season. A smart contract would allow the Buyer to avoid paying a lawyer or to have to consult with the Seller’s lawyer in dealing with an escrow agent or title agent. This is because by appearing on the blockchain the Buyer and Seller could avoid using a third party because a smart contract ELIMINATES THE NEED FOR A MIDDLEMAN by allowing parties to interact on a CENTRAL COMPUTER SYSTEM. Blockchain computer programs would allow this Buyer or Seller or even multiple Buyers and Sellers to negotiate commercial lease agreements. In this example, the blockchain would allow the Buyer to pay for his home in cryptocurrency and then have a self-executing real estate contract, deed, and mortgage note to be computer generated on the blockchain without the need for the parties to sign and execute a traditional contract with lawyers, real estate agents or other third parties.
- EXAMPLE THREE: Another example of a smart contract would involve an individual trying to buy a car on Auto-Trader. Under a pure smart contract situation, a buyer and commercial seller could negotiate the sale of the car on an existing blockchain over a central computer system. You could use your cellphone or computer to pay the seller on the blockchain. The seller could then have the blockchain issue a self-executing automobile contract, credit report, and promissory note. It could then negotiate the terms of the contract and enforce the terms required for closing the agreement. In this way, all car dealers, credit agents, and bank loan officials could be removed from the transaction. The contract essentially could be self-executed within minutes and avoid the consumer having to appear in a car dealership for over an hour to consummate the car closing documents.
What are the benefits of smart contracts?
- Immutable & distributable.
- No third party required.
- PRO: decentralized, no third party involved in contract formation, self-authenticating, self-executing agreement, faster b/c it does not require a third party middle man such as a bank, insurance company or landlord or leasing company, faster, cheaper.
- CONS: smart contracts are on a computer blockchain so they are immutable & they can’t be changed by the parties after they are executed.
- Another concern is they largely eliminate the need for attorneys or other third-party agents because the contracts are depersonalized and encoded on a computer blockchain.
- They could be your mortgage, lease agreement.
- Smart contract definition: In Arizona & Tennessee for example, state laws have defined smart contracts as an event driven program w/ the state that instructs the transfer of assets.
- However, technologists might differ in their interpretation of what smart contracts are: “an automatous agent.”
- A digital agreement.
- Smart contracts enable parties to validate terms or transactions of a contract & to execute them automatically without a third-party intermediary.
- Generally it is tamper proof.
- Beneficial if want to avoid a third-party intermediary.
- With smart contracts, you can do a mortgage closing without an escrow agent.
- Don’t need an attorney to check the title of the deed or contracts b/c everything is self-executed on the blockchain.
Why are they so popular?
Smart contracts are evolving because they:
- Provide speed in entering into contracts
- Safely allow multiple users to participate on a blockchain
- Are secure and tamper proof
- Allow people who don’t necessarily trust each other to form contractual agreements.