With the rise of bitcoin and other blockchain currencies, there has been a smaller boom of “news” about so-called “smart contracts.” San Diego Corporate Law suggests that you ignore this looming fad. The only thing “smart” about these so-called “contracts” is the slick marketing and the buzzwords.

So, what is a “smart contract?” According to one recent media report, smart contracts are “computer programs that can run on blockchain networks and can … track all the rights and obligations of a given contract and automatically trigger payments as the contract progresses, without anyone having to chase up payments offline.” Investopedia identifies several attributes of smart contracts, including:

• Self-executing
• The terms of the contract are directly written into lines of code
• The codes/agreements “exist across a distributed, decentralized blockchain network”
• Are available to disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism
• “Trusted, traceable, transparent, and irreversible”

Notice all the buzzwords. Smart contracts are being pitched as a way of eliminating confusion and the need for third party enforcement — that is, no litigation or arbitration. The “contracts” are resident online for anyone to use and, as the sales pitch goes, this provides autonomy, avoids middlemen/women (lawyers), and saves time and cost.

The underlying concept is based on “if/then” chains used in coding. Code is written in long “if/then” chains. Example: “If A, then X; but if B, then Y.” Smart contracts are applying this concept to business and sales transactions. Example: “If [consumer orders product] AND if [payment tendered], then [product delivered].” A cursory glance shows that there is nothing particularly “smart” here. This is the standard business model of Amazon.com or eBay.com or any online retailer.

One real world example of a supposed “smart contract” is flight insurance that can be bought from fizzy.com. See website here. They market their insurance as “Smart insurance. Automatic compensation.” Their if/then chain has six steps:

IF — [customer] (1) enters flight details

(2) personalizes coverage

(3) provides personal information AND

(4) submits payment

AND IF (5) flight is two+ hours delayed

THEN — (6) fizzy.com issues compensation

This is not “smart” or even new. All the alleged advantages of “smart contracts” can be said about a mechanical vending machine. Here is the if/then chain for a vending machine: If [customer] inserts currency and makes selection, then [vending machine] will issue product selected; if [selection does not vend], then [currency refunded]. The mechanical vending machine has all of the supposed advantages of a “smart contract:” autonomous, readily available for any person to use, no need for a middleman/woman, self-executing, trustworthy, low cost, quick, traceable, transparent, and irreversible.

In summary, smart contracts are not actually very smart. Your business needs customized contracts drafted for the unique needs of your business that are enforceable and cover foreseeable risks and eventualities.

Contact San Diego Corporate Law Today

If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters and he proudly provides legal services to business owners in San Diego and the surrounding communities. Like us on Facebook.

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