Smart Contracts…….not smart, not contracts

Smart Contracts have been recently described as “being one of the most transformative aspects of Blockchain.  In fact, one of the most transformative technological developments for decades”.

This could be correct, or it could be about as accurate as the declaration:

“Blockchain is the most significant innovation since the introduction of double entry bookkeeping”.  There may be a range of views as to the accuracy of this statement.

Smart Contracts is smart in one regard:  it is a clever piece of marketing.  “Smart” implying some form of ability to adapt to changing circumstances, and “Contract” with all the implications of certainty, clarity, precision and enforceability.  Unfortunately Smart Contracts suffer from two drawbacks – they’re not smart and they’re not contracts.

The expression Smart Contracts can be traced back to Nick Szabo in 1994 when he combined the two words to describe a computerised transaction protocol designed to execute terms in a contract.  The Bank of International Settlements describes Smart Contracts as:

“self executing code to automate the fulfilment of contract terms.  Examples of this include the execution of interest and principal payments on certain dates.”

In other words, a block of code that completes of sets of actions on the occurrence of certain triggers – pretty straightforward really: useful but not particularly clever, not particularly smart.

With regard to “contracts” we have the classic collision of language meeting law.  Whilst it is possible to automate a set of sequences dependent on the occurrence of specific events, this bears no resemblance to a “contract” in the conventional sense.

Indeed, in a public or “permission-less” ledger the entire set of rules determining the interaction of events across participating nodes will be determined solely by the protocol.  In this situation, there isn’t a central counter party against which to proceed in the event of a breach.  Should the question arise “who is the contracting counter party” the inadequate answer of “the code” just isn’t going to be acceptable.

On the other hand, distributed ledgers implemented via a restricted platform, accessed by arrangement, controlled by a centralised authority and administered by rules maintained “off ledger” does have a counter party against which to proceed – the central authority.

This however raises a larger question: is this type of “private ledger” really a chain of transactions, verified by node consensus across an unlimited number of ledgers, grouped together into blocks, or is this just really just a distributed database with an encryption function.

Let’s not dwell on this.  The expression Smart Contracts represents a clever bit of marketing.  What the expression is really trying to describe is the execution of specific tasks subject to changes in state conditions.  This could be described as “dependent workflows” or as Aite Group describes it “intelligent business workflow logic” – either of which is a significantly more accurate and preferred expression to “Smart Contracts”.

← Return to News