Very DUMB Smart Contracts!

Smart Contracts get a lot of hype. Proponents paint a utopian vision of contracts that can be enforced without lawyers, courts through automatic and impartial completion in an environment of distributed trust.

Smart Contracts, living on a blockchain near you, would allegedly remove the need to trust the other party to execute. Lawyers would retrain, judges would retire, and the rest of us dances into the sunset.

Really?

What is a Smart Contract?

A normal contract is an agreement between two or more parties that binds them to something in the future.

A Smart Contract has conditions that are evaluated and executed by computer code. It has trustless execution in that parties do not depend on a third party to verify or execute various conditions. Instead of relying on the other party to make good on their word or even worse, relying on lawyers and the legal system to remedy things should something go wrong, a smart contract executes what’s supposed to happen timely and objectively following a pre-agreed set of rules and conditions.

Are they really smart?

Not really. In fact they are not ‘smart’ at all - there is no build-in intelligence, real or artificial. They are smart only in the sense that, once entered, they do not require cooperation to be executed. But that is about it.

Smart Contracts require parties to anticipate and encode any and all circumstances and conditions. This results in a (potentially very long) list of if--then--else clauses. Anything that falls outside the encoded rules aspects of the contract? Tough luck!

A truly ‘smart’ contract would take into account circumstances, spirit of the contract and make fair rulings under all circumstances. Evidently, a Smart Contract is not smart at all. 

Smart Contracts are Difficult

Common sense, precedence, and spirit are not Smart Contract concepts. Everything needs to be spelled out under any possible variation that the contract parties can think of. Lawyers spend a lot of time learning how to write contracts, and even then parties end up in conflict a lot of the time.

Because everything needs spelling out - Smart Contracts that are complete will by implication be much more complex/lengthy than the ‘old-fashioned’ contracts. And it is nearly impossible to prove that a contract is indeed dealing with all eventualities.

Most Smart Contracts Will Not be Trustless

Trustless execution - a major benefit of Smart Contracts - is only possible if physical asset ownership does not exist, or if physical and digital ownership are inextricably linked. Many of us may for example not have a big issue with using a Smart Contract to sell a piece of used software with the accompanying license key, or to buy an online subscription.

But how about your house or your car. When I buy your house, the Smart Contract needs to ‘know’ that you actually transferred the house to me, and someone needs to attest to that. And what happens if, heaven forbid, you decided to paint the walls black the day before transfer, or took the front door. What happens if someone steals the private key that signifies my own ownership - will I get kicked out? If I lose my key, is the house no longer owned by me? Who is the arbiter? Etc etc

In all these use cases, there’s a need for the digital world to “know” about the physical world. There has to be some trust in some third party to verify the events in the physical world. This gives raise to another interesting conundrum - the physical world is governed by the law of the land, the digital Smart Contract by the rules it embeds. What happens when the two conflict?

Conclusion

It seems to me that in most applications today Smart Contracts add complexity by being much more complex to write than traditional contracts, while in the end still needing trusted third parties, arbitration, or courts to deal with disparities between the Smart Contract and the laws governing the physical world.

No doubt that many innovators are addressing this issue. Let’s watch this space!