Are Smart Contracts Real Contracts?
Credit: Nancy Baker Cahill, Contract Killers (NFT Cube), 2021. Courtesy of the artist
In a recent article written for Right Click Save, Guest Work Director and Founder Alana Kushnir traces a history of contract automation, assessing the enforceability of smart contracts in the age of NFTs.
Alongside the rise of NFTs, smart contracts have received quite the fanfare over the past year. But, in truth, they’re a pretty old-school phenomenon. In fact, the first smart contracts had little to do with NFTs, blockchain, or the Internet, and more to do with the humble vending machine.
In 1996, more than a decade before the release of the original blockchain white paper by Satoshi Nakamoto, the computer scientist, cryptographer, and legal scholar Nick Szabo published an article in which he first used the phrase “smart contract.” At the time, he was completing a graduate degree in Law from The George Washington University Law School. In the text, Szabo defined a smart contract as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.” And he expressly linked smart contracts to vending machines, describing them as the “primitive ancestor of smart contracts.”
Szabo saw the potential of smart contracts to address the challenges of enforcing legally binding contracts. He also questioned the requirement for a judicial system to decide what physical steps are to be taken by an enforcement agency, if contractual arrangements were readily verifiable. For Szabo, contractual enforcement could become proactive, rather than reactive, if smart contracts were “embedded in the world.”
In recent years, the global legal industry — from law firms to in-house legal operations — has largely embraced AI, machine learning, and automation technology as a way of reducing the time (and therefore costs) of more mundane, data-intensive tasks such as contract management and trial discovery.
The range of smart contracts has diversified over time. These days, the degree to which a smart contract is automated and/or decentralized is more akin to a sliding scale than an either/or. A case in point is an online agreement like a clickwrap agreement. Consider, for example, Uber’s Terms of Service or “T&Cs.” When a user downloads the Uber app, a contract is formed between the user and Uber. The T&Cs spell out the rights and obligations of the user and Uber. While the form of the contract is digital, its substance is written language.
Another genre of smart contracts is “data-oriented contracting” and “computable contracts.” These were first identified by legal scholar Harry Surden, whose theories built upon Szabo’s smart contract concept, as well as cryptographer Ian Grigg’s “Ricardian Contract” which defined a type of value that could be read by a computer. In a 2012 article titled “Computable Contracts,” Surden argued that it was possible “to represent contractual obligations in forms other than ordinary language,” including computer-processable data.
Nancy Baker Cahill, Contract Killers (Handshake), 2021. Courtesy of the artist
Yet even now, the degree to which smart contracts are legally enforceable as contracts, and might even replace legally enforceable contracts, remains the province of theory and is yet to be tested properly in a court of law. A number of blockchain-based art projects have emerged in recent years that elaborate such theory.
Last year, the artist Nancy Baker Cahill released a series of augmented reality artworks-turned-NFTs titled Contract Killers (2021). As well as driving much-needed discussion around the suitability of the ERC-721 standard for artworks, Cahill also used the vocabulary of smart contracts to illustrate the breakdown of social contracts.
There is so much to be learned, including by lawyers, from the fascinating history and theory of smart contracts.
Read the full article here.