The Future Of Law - 7 Things You Should Know About Smart Contracts
In this podcast episode we speak with Chris Dorian of Buildsort and TecStack Trainer, about Blockchain and The Future of Law – 7 Things You Should Know About Smart Contracts (especially in regards to legal contracts and the building industry).
How does Emerging Technology impact your profession?
Please note: This does not constitute legal advice, no one involved in this interview or blog is a lawyer: if you need legal advice please consult your lawyer.
What is Blockchain?
Chris speaks about what blockchain is and why it’s important for legal professionals to embrace these tech changes… while it may feel inconvenient for lawyers to have to start learning a wave of new and what can feel like, confusing information, it’s what clients are or soon will be, expecting. These digital contracts are here, taking roots in our legal system, whether we like it or not. For lawyers the disruption is coming from their clients, not internally. Their clients are the ones that need to administer contracts, and that is where Smart Legal Contracts benefits are found.
“We were moving into a world of purely digital records and as anyone that has had any acquaintance with photoshop [would know], it’s easy to alter digital records.” (Click here to listen to the Crypto Clothesline Podcast with Dr. Scott Stornetta)
Excerpt from the World Economic Forum:
“Blockchain technology, by using mathematics and cryptography, provides an open and decentralised database of every transaction involving value.
“Money, goods, property, work, or even votes, creating a record whose authenticity can be verified by the entire community. Third party trust organisations may no longer be necessary. Blockchain technology, within 10 years, may be used to collect taxes…
“Every transaction will be recorded on a public and distributed ledger. Like wills and contracts that execute themselves, or dated proof of ideas of existence, much like a patent. Blockchain will become a global, decentralised source of trust…
“A huge proportion of trust services from banking to notaries, will face challenges on price, volume and in some cases, their very survival. Unimagined new networks will evolve to meet society’s needs more cheaply and potentially more securely.
“Will governments, financial and legal institutions embrace blockchain? What will happen to the ones who don’t?”
How Does Blockchain Work?
A blockchain being a public electronic ledger built around a peer-to-peer system, can be openly shared among different users to create an unchangeable/immutable record of transactions.
Each set of transactions is time-stamped, and linked to the previous one. Every time a new set is added, that data set becomes another block on the chain.
Blockchain is updated by consensus between all participants in the system. Once new data is entered it can’t ever be erased, making it a ‘write-once, append-many’ kind of technology: a verifiable, auditable record of each and every transaction.
“Blockchains transfer their immutability to smart contracts since, once they are committed to the chain, they cannot be changed. Smart contracts have trustless execution where the need for intermediaries is removed, and traditional transactional frictions are minimized.” https://blockonomi.com/oracles-guide/
What’s A Smart Contract And How Does It Differ From A Smart Legal Contract?
Chris goes on to explain that smart contracts, which are digital contracts run on different blockchains, were first created in the 90s by Nick Szabo. It was intended as a simple program where when some input occurred then it would pay out a cryptocurrency or change a digital asset. These digital assets could represent tokens, real estate titles and/or cryptocurrencies. The problem with them is that they rely on the “Code is Law” approach, which doesn’t work in the real world.
A smart legal contract is the answer to the “Code is Law” problem, and the Ricardian Contract was invented to overcome this.
- your typical legal contract, most likely in a digital format, and it could be a standard form contract or drawn up by lawyers, which is the legally binding and disputable element, and
- an executable code for the clauses that can be automated via data inputs added to a blockchain.
There Are Challenges Obviously With Both Smart And Smart Legal Contracts:
- Human error: the data or the contract t can be entered incorrectly
- Data is added into blockchains from external sources called ‘oracles’ that both parties must be able to trust
- Oracles can be accidentally or intentionally corrupted
Some examples for the construction sector where Smart Legal Contracts can help:
- Design changes or variations. When a 3D model is changed the modified Bill of Materials can be updated and the differences between them found, when paired with a Schedule of Rates, the contract value can be updated, otherwise the steps can be carried out to come to an agreement within the steps of contract.
- Delays and liquidated damages. All parties have a copy of the construction program. When there’s inclement weather for example, these programmes can be extended and the benefit of using blockchain is that everyone has visibility of the construction program.
What’s An Oracle And What Does That Have To Do With Blockchain And Smart Contracts?
Blockchains and smart contracts can’t access data from outside their network. A smart contract often needs access to information from the outside world in order to know what to do next. Info that’s relevant to the contractual agreement, entered as electronic data, also referred to as oracles.
Oracles are services that send and verify real-world events and submit this data to smart contracts, triggering changes-of-state on the blockchain.
“Oracles are data feeds from external systems that feed vital information into blockchains that smart contracts may need to execute under specific conditions. The growing need for oracles represents the continued expansion of blockchain systems into practical and real-world use cases, where accurate data is crucial.” https://blockonomi.com/oracles-guide/
So we can say that an oracle feeds information into the blockchain (which acts as the middleware) underlying the smart contract execution.
Oracles can either be based on software or hardware. An example of a hardware-based oracle might be an RFID sensor in a container transmitting location-based data, and a software one might be an API application sending information about price changes in the stock market, or in the case of our inclement weather delay claim above, data from the Bureau of Meteorology on wind and rain data to automate delay claims.
What Constitutes A ‘Good’ Smart Legal Contract?
Like all contracts they must have the normal formation requirements:
- Agreement (Offer and Acceptance)
Many of these are much the same in a digital space as the real world but there can be some intricacies to some of these requirements as soon as you move to a digital agreement.
An Example Of A Case Where A Smart Legal Contract Could Work, Especially With Regards to The Property And Construction Industry.
Chris cited some interesting use-cases for the implementation of smart legal contracts in the real-world including tokenisation in real estate.
Already in South Australia, changes to the traditional property market with the introduction of digital innovation is dramatically disrupting the way everyday people can access this market.
In this innovative Australia-first initiative, physical brick-and-mortar property, previously unavailable to many due to the high amounts of funds needed to participate, and the long-term time commitment needed to wrap up those precious funds, can now be accessed pro rata.
By enabling the purchase and sale of small portions or ‘bricklets’ of real estate assets through tokenisation, people of almost every walk of life can participate in property investment, rather than having to access the bulk of hundreds of thousands of dollars with its associated risks in a struggling property market, as has been the case to date.
“Lakeba Group is gearing up to revolutionise the property investment sector by introducing blockchain technology to fragment land titles into ‘bricklets’.
Lakeba Group’s technology will make it more affordable for people to invest in property by enabling small parcels of a property title, known as ‘bricklets’, to be purchased by individuals. Bricklets can then be traded in the same way entire property titles are bought and sold, only incurring pro rata costs.
The technology will make property investment more affordable with people able to purchase individual bricklets, rather than buying entire properties.”
Blockchain and Real Estate is gaining traction around the world, Fibree is a Global organisation to foster Blockchain within the Real Estate Industry, and has 35 countries and over 5000 participants. The future of real estate is tokenised, and can give benefits to Self Managed Super Funds, Investment, Securities and fund raising. (Chris Dorian has since been appointed Regional Chair of Fibree in December 2019).
This podcast and accompanying blog, as you can imagine, is just the tip of the blockchain-smart-contract iceberg.
If you’re wanting to be part of the innovation-driven, future-ready movement (and not end up a fossilised victim of it) then enrol in our next-level TecStack trainings together with Chris Dorian, where you learn how to create smart legal contracts, with no coding or programming skills required.
This and much more is explored, discussed and presented in the TecStack professional trainings we’re providing for various sectors including law, real estate and finance. Check out our upcoming courses on tecstack.io.
Abheeti Kathryn Pass
Educator at TecStack