On Tuesday, the Government Digital Service organised a workshop on Blockchain gathering people from Academia, industry and government, and focusing on how blockchain technology could help improve our lives. Proof that the interest around blockchain is rising, not only for its implications on the financial market (you name it, bitcoin) but for even more practical uses.

If you are not familiar with the concept of blockchain, this nifty video will help:

So, the first thing that come to our legal geek minds when talking about blockchain (because with blockchain it is strictly interwoven) is smart contracts.

What are smart contracts, why they need blockchain and why are they so exciting?

Let’s start with an old school example. Usually, if we have to transfer something valuable, we make a written contract – and usually we go to a lawyer for that. The contract and the lawyer provide the architecture of trust that we need to make sure, or very plausible, that the other party will comply, that is, will pay the price if we transfer the good.

In simple terms: we need a written contract and (perhaps) a lawyer to create this architecture of trust – plus someone to enforce the terms of the contract.

What’s a smart contract then?

A smart contract is a contract that is able to enforce itself. In the example made famous by Nick Szabo in 1997, one of the simplest form of smart contract is a vending machine: it can transfer the ownership of something, for instance a bottle of water, if and only if  I insert the right amount of money, say £1. The machine somehow “knows” and “decides” when it’s time to transfer the ownership of the water: put just 90p in it, and it won’t work.

Well, sometimes you may get lucky but that’s another matter.

20 years later, the concept remains the same, but it is translated into the digital world: a smart contract is a contract that, for instance, transfers the ownership of a digital asset only if digital currency is transferred. It’s a contract written in code; when the software runs, the ownership is transferred only if the price is paid.

But how do I make sure that the software and so the contract is correctly executed? Again, the problem is one of trust. Here’s where blockchain comes handy and where the whole thing becomes really interesting. Blockchain creates an architecture of trust for smart contracts to operate.

Smart contracts alone are just softwares. Smart contracts + blockchain become a whole new paradigm.

“Once the code of the contract is uploaded and recorded onto the blockchain, the parties can have confidence that the contract cannot be altered, and that it will perform as expected” says Josh Stark, lawyer and head of operations at Ledger Labs, a blockchain consulting firm. The blockchain makes sure that the contract is valid and it can be enforced.

So, no need for lawyers anymore? Not really. In all truth, smart contracts are still the future. Indeed, there are agreements that can’t be translated into code yet, like the ones that involve performance. Moreover, there are agreements that are 30 pages long: how to translate that in simple, executable code? Finally, because a smart contract is written in code and not in English, “Clients may require lawyers who can read code to confirm that the code does what the smart contract says it’s going to do”  as Sean Murphy, partner at Norton Rose Fulbright put it. Basically, we’ll still need lawyers to interpret and translate the content of a smart contract, and the risk is that we are just replacing “literacy in legalese with literacy in code”.

These, and many other (legal) issues need to be taken into account when talking about smart contracts: but the potential they have make them incredibly interesting. Right?

Further readings: How close are smart contracts to impact real world law? By Josh Stark

What’s a smart contract and what’s it good for? By Sue Troy