“Smart contracts” are digitized, self-executing agreements that may reduce or, eventually, eliminate the need for courts to enforce certain agreements. Now in the early stages of development, the idea has been around since 1994. Two start-ups, Codius and Ethereum, are working on systems that aim to make smart contracts a reality.
Smart contracts are more than a standard “auto-pay” function. Through the use of cryptocurrency, or decentralized currency, Codius and Ethereum seek to significantly lower the cost of certain transactions, like mortgages, that often involve several administrative fees paid to lawyers or banks over a long period of time.
The idea is kind of like Uber or Airbnb. Essentially, two people make an agreement, which is enforced by a third party. If the Uber driver doesn’t show up, or the Airbnb host doesn’t leave the keys, the purchaser takes it up with the company, not the individual. If a party to a smart contract violates a condition of the contract, then the other party takes it up with Codius or Etherium, and rescission or money damages results, or whatever was agreed upon.
“Smart contracts” are still perhaps a thing of the future because the system depends on a much more automated and interconnected society. For example, if a landlord and tenant set up their rental agreement through a smart contract, how is the landlord going to evict the tenant when he stops receiving rent money? Wouldn’t the landlord have to go to the court? With a smart contract, the tenant may, for example, access his rental property with a key-fob or his smartphone. Once Codius or Ethereum (whichever service the contract went though) registers insufficient funds in the tenant’s account at midnight on the first of the month, the tenant’s access device would simply stop working.
Anybody could spot several instances from the preceding landlord-tenant example where a lawyer would still be needed. In fact, the development of smart contracts will surely require extensive assistance from contract, constitutional, business, corporate, and civil rights lawyers. However, the above example is primitive compared to the vision that these innovative tech startups have for the future of smart contracts. The end goal of the smart contract is to reduce costs in enforcing agreements by cutting out human middlemen and replacing them with computer programs.
By Brian Unger