Smart contracts: closer to becoming reality than you might think

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You have probably already heard the latest buzzword: smart contracts. After the financial and legal sectors, real estate and energy have now also seized on the idea. People often think of contracts as being boring and complicated. Put the word 'smart' in front, though, and all of a sudden those same people are eager to hear more.

If self-driving cars are already a reality, why should an autonomous financial service be impossible? Sanne Lamerigts Innovation Manager Innovation Centre

We already have smartphones, smart fridges, smart buildings and smart cities, and now we have smart contracts. This latest phenomenon is an interesting one, situated at the crossroads between two completely different worlds: the conservative legal profession and the forward-oriented tech business. It is perhaps surprising to find that lawyers and programmers even speak a common language: smart contracts are living proof that they do. ABN AMRO is experimenting with these new forms of contracts, and I would like to share what I have learned so far.

From musty papers to contracts with an awareness

The idea of a smart contract goes back to the 1990s. As early as 1996 Nick Szabo - computer scientist, programmer and law student - was writing papers that described programmable contracts:

'Digital, computable contracts where the performance and enforcement of contractual conditions occur automatically, without the need for human intervention.'

An analogy that I like is to see a smart contract as a living contract with a programmable awareness. This is in fact what sets them apart from normal paper and digital contracts. A smart contract can interact autonomously with the outside world: with systems, models and analysis tools, for instance. If you are a homeowner, your existing paper contracts are probably lying forgotten in some musty draw. Imagine what it would mean if your 'living' contract could respond to events around you - if the value of your house rises, for example. 

Digital building blocks

The only way to find out what the possibilities and challenges of these smart, reactive contracts are and how they actually work is to program a contract. ABN AMRO has set up a series of experiments to do this, including legal coding workshops: lawyers, programmers and innovation specialists come together with a single goal in mind: to program a smart contract. The results are astonishing. 

The first step is to dissect a contract by filtering out the building blocks (the clauses). This immediately reveals how the contract is structured. The text blocks are then translated into code to create digital legal building blocks. It then becomes a simple matter to enter the details of the various arrangements, such as the duration of a loan.

However, the law is not always black-and-white, and not every clause can easily be converted into binary code. This grey area is where the challenge lies. How should we tackle it? Has the time to come update the law and make it more concrete and more binary? Although these questions are intriguing, we generally do not have ready-made answers.

The next level: autonomous contracts

Creating a smart contract involves more than simply converting clauses into code. Although the contract is now in digital format, it still lacks any smart elements: it is purely static and incapable of reacting to events. The next step is to give the contract an awareness, by drawing on the possibilities of coding. If the contract can be made to react to a series of reliable sources (oracles), it can make new suggestions and eventually even make autonomous decisions. A blockchain can then create a distributed and synchronised ledger that connects the various parties to the contract.

Consider your contract with the company that supplies your energy, for example. Generally, once you have signed it, you will never spare it another thought. A 'living' contract with a lasting awareness can deploy self-teaching systems to predict your energy consumption. The contract might then buy as much energy as you need from the excess generated by your neighbour's solar panels, or it might decide to sell whatever energy you have generated but are not using. This might seem impossibly far off, but a startup in the US is already doing this.

The impact on the financial world will also be huge. Truly smart contracts can accelerate the evolution toward autonomous finance: a financial world that is run entirely by independently operating contracts. If self-driving cars are already a reality, why should an autonomous financial service be impossible? 

Trust

The key is trust. First of all, the oracles need to be reliable. A smart contract is only as good as the information that its sources provide. It is important, then, for those sources to be accurate and reliable. The Office of the Cadastre and the Public Registers is an example of an official authority for real estate registrations. 

The next challenge is how to sign the contracts: if the contract is autonomous, where do you put your signature? Not only must the code correspond to the text that the consumer reads, but it is also important for the consumer to understand exactly what he or she is signing. The autonomous energy contract described above shows what I mean: the consumer is not buying energy, but an optimised energy management system (for example by selling excess energy).

Do you have the courage to relinquish control?

Although we still have much to learn on this subject, in my estimate the legal-tech world will be a rich source of new jobs. A popular job in the future will be Smart Contract Auditor - it already is, in fact: our experiments offer plenty of exciting issues and numerous possibilities to investigate. 

One thing is sure: autonomous contracts are closer to becoming reality than you might think. The first self-driving cars have already hit the roads, and the real question for us is this: do we have the courage to relinquish control? Do we have the courage to sign a 'living' energy contract, or to buy a smart service with a programmed awareness that will optimise our financial situation?

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