Smart Contracts

40

Many smart contracts are neither smart nor contract (Mik, 2017). The source of misunderstanding is likely found in the technical origins of the term smart contracts and it is exacerbated by the clash of many disciplines. Nick Szabo introduced the concept of smart contracts back in 1997 when he compared smart contracts to a vending machine (Szabo, 1997). After more than 20 years the concept has evolved into a buzzword that is often misused. The following section explore the concept of smart contracts using the same methodology adopted throughout this chapter, its objective is to bridge the terminological and technical gap between the law and the narrative within the crypto space. This section provides an overview of the technical definition(s) of smart contracts before attempting a phenomenological account of the concept; then it aims at providing a legal account of the phenomenon before its concluding remarks.

As expected, there is no standard definition of smart contracts from a technical perspective, different designers define them in different ways. Others, on the contrary, take the notion for granted, for instance, Ethereum’s yellow paper does not define smart contracts, rather it considers their characteristics. First, it references an entry on the Bitcoin wiki that refers to “contracts” by saying that smart contracts contain a set or arbitrary rules that control a digital asset implemented in code. A look at the Bitcoin Wikipedia comforts us by stating that contracts on a blockchain “don't make anything possible that was previously impossible”13_{. Second, Ethereum regards smart contracts as “cryptographic ‘boxes’ that contain value} and only unlock it if certain conditions are met” (Wood, 2014). Wikipedia defines smart contracts as “computer protocols intended [..] to facilitate, verify, or enforce the negotiation or performance of contracts”14_{. In Bitcoin contracts are not smart and are regarded as: “a method to form agreement with} people via the block chain”. There are other definitions of smart contracts provided by industry, academia and other institutions that I will not consider in this section.

13_{https://en.bitcoin.it/wiki/Contract}

41

In elaborating a phenomenology of smart contracts from the technical perspective, the analysis will try to establish a minimum common denominator that should encompass what smart contracts are without being concerned about what they can (maybe) do. The following approach may seem minimalistic to some, but rigor requires to take such an approach in defining this term, after all even Ethereum’s co-founder Mr. Vitalik Buterin acknowledged that the term smart contracts could be confusing, but it was kept for reasons of continuity15. In the difficult task of describe a phenomenology of an elusive and confused concept such as the one of smart contracts, Heidegger’s methodology guides us toward clarity. The phenomenon of a smart contract in distributed consensus systems is a set of instructions that are executed on a decentralized, distributed network of computers. This definition of the phenomena is consistent with others in the technical literature (Bartoletti & Pompianu, 2017; Bhargavan et al., 2016; Gonzalez Rivas, Tsyganova, & Mik, 2018; Grigg, 2015). The logos of smart contracts is to enable the trusted and verifiable execution of instructions without relying on a central authority. As such, smart contracts are tamper-proof, censorship-resistant software programs whose execution does not depend on a single node in a network of computers. It is also important to add that smart contracts share the emergent properties of the system in which they run. For example, smart contracts in Ethereum are publicly visible, and stored in a decentralized fashion across many nodes.

The conditions of possibility of smart contracts are the following. The existence of a decentralized network of computers that can reach consensus on the state of the system, like a blockchain or distributed ledger architecture16. The presence of a scripting language that supports smart contracts. Lastly, smart contracts need to be deterministic for the same reason put forward earlier in this chapter; this may limit their abilities to interact with the real world unless some other mechanism is implemented17. This account

15_{https://insidebitcoins.com/news/vitalik-buterin-i-quite-regret-adopting-the-term-smart-contracts-for-ethereum/182844} 16 _{It is not clear at the time of writing if the third type of data structure (the TANGLE) can implement smart contracts as}

defined in this work.

17 _{One possibility would be to pre-compute the operations of a smart contracts and broadcasting them to the network before} the verification phase as a way to minimize the use of a non-deterministic programming language.

42

of smart contracts may seem to be overly simplistic and limited to the reader who has been exposed to the mainstream discourse on the technology (Cutts, 2019; Frantz & Nowostawski, 2016; Shermin, 2017), but it is consistent with the actual phenomena of smart contracts, that is, how smart contracts are experienced within systems such as blockchains and distributed ledgers. A further reason to adopt this conservative definition is that, at the time of writing, there are many smart contracts platforms, thus raising the complexity in establishing a richer definition capable of encompassing all different solutions. The present approach simplifies the discourse and fosters a bottom-up approach to understand the technology at hand and helps us to build up the terminological framework adopted in this dissertation. Concluding, smart contracts are software programs that execute on a distributed consensus system; however, the unfortunate terminology demands consideration of the phenomenon from the legal perspective.

The use of the term contract spurred the interest of many legal scholars; some have developed analysis from a contract law perspective (Alberini & Pfammatter, 2019; Brownsword, 2019; Cuccuru, 2017) some expanded the theme of execution (Unsworth, 2019). Others analyzed terminological issues and the legal impurities of transacting with some real-world goods on a blockchain (Mik, 2017). Much effort has been channeled (again) toward formalizing contractual law for smart contracts deployment, this tendency is well represented both at the industry and the academic level (Governatori et al., 2018; Grigg, 2015; Idelberger, Governatori, Riveret, & Sartor, 2016; Tai, 2017). Arguably, the legal viewpoint is more informative in respect to the technical one, likely because when laypeople read the term smart contracts, they tend to expect some more legal rather than something which belongs to the set of software protocols within the field of distributed computing.

The usual starting point for the phenomenological analysis is the phenomenon, from a legal perspective smart contracts are not (always) contracts. First, any meaningful discourse on the contractual nature of smart contracts presupposes a legal frame of reference; the following discourse develops under the Italian legal framework. Therefore, the following remarks may not hold in other legal systems. The

43

art. 1321 of the Italian civil code defines a contract as “the agreement between two or more parties, to constitute, regulate or extinguish among them a patrimonial juridical relation.” Art. 1325 dictates the requirements that any contract must meet; if a contract does not meet these requirements the sanction is nullity. The requirements are (a) the agreement of the parties (analogous to the meeting of minds doctrine form common law jurisdictions), (b) the cause (the economic and social function that the parties want to achieve with the contract), (c) the object and (d) the form if the law requires it. Let us assume that smart contracts do indeed constitute, regulate or extinguish a patrimonial relation. Next, we need to assess if smart contracts meet the requirements of art. 1325. It is uncontroversial that the agreements can be reached with the use of digital signatures or with ICT technologies and that, therefore, an agreement could be represented by signing the transactions that triggers a smart contract. However, it is by no means required that a smart contract involves different parties. For example, I could code a smart contract that transfers assets between two account that I have control over, thus that particular smart contract would not qualify as a contract under Italian law, for a contract with oneself is not a contract at all. Additionally, smart contracts might be deployed with the expectation that parties will later adhere to it, so that they would not be regarded as contracts but as offers to the public. Requirement (b) is also uncontroversial, because it can be argued that most smart contracts have a legitimate cause. Concordantly, smart contracts usually have an object thus requirement (c) is also met. The last requisite (d) may nullify smart contracts which constitute, regulate, or extinguish judicial relations for which a particular form is required under Italian law, while accordingly to the free-form principle every other relation could be legally represented in smart contract code without incurring in the sanction of nullity. This short legal analysis of smart contracts under Italian law leaves many problems open for discussion but more importantly it shows how, with regard to smart contracts nothing is new under the Italian sun. What we can say is that smart contracts that constitute, regulate, or extinguish judicial relation for which a specific form is required under Italian law (so-called forma ab substantiam) have no legal effects (nullity). From the perspective of the qualification smart contracts do not pose legal

44

problems that have not been already discussed at length with respect to contracts concluded with electronic means (Scholz, 2016). Hence, not every smart contract in the technical sense is also a contract in the legal sense, much in the same way as not every software system implements a contractual relation.

From the legal perspective, the logos of smart legal contracts does not strongly differ from the logos of legal contracts in general. The main difference being the platform where the performance of the contract is executed, along with the lack of flexibility of smart contracts compared with other contracts (Sklaroff, 2017). Thus, in the narrow case in which a smart contract qualifies as a legal contract the logos of former coincides with the logos of the latter. That is, the reason for contracts is to create, to regulate, to modify or extinguish patrimonial relation between parties.

Lastly, the analysis moves to the condition of possibility of smart contracts in the legal sense. One can argue that this condition resolves itself in the mapping of each specific smart contract to the norms of contract law in each independent jurisdiction both at the national and international level. The technology of contract in the legal sense is platform agnostic and blockchains, and distributed ledgers are no exception. A contract can be formed orally, on paper, or on by signing a transaction in the Ethereum blockchains. Accordingly, the condition of possibility of smart contracts (a) depends on the jurisdiction through which the phenomenon is analyzed, and (b) implies a legal analysis of each smart contract implementations according to the frame of reference adopted.

Many interesting legal questions arise from the implementation of smart contracts that are, unfortunately, outside the scope of this dissertation because they do not concern the reason why agents engage with distributed consensus systems. For now, the reader must keep in mind that in the rest of this work the term smart contracts will be used in the technical sense unless otherwise stated. In fact, much of the excitement around smart contracts in the legal community seems to overlook some major technical difficulties (Low & Mik, 2019); considering the aspiration of this work the discourse will not deal with problems that may or may not arise from technical achievements but deals with the opportunity to use smart contracts as a set of instruction to program distributed networks.

45