A World Without Lawyers? 21st Century: Smart Contracts

Placing bets with friends on the outcome of a game between two teams is quite common. But let’s be realistic: when it comes down to it… how often is that “bet” actually settled? The truth is that one of the two either doesn’t have the money or simply doesn’t want to honor the bet. While this isn’t a situation that, in principle, would lead to legal consequences, there are others that would. For example, entrusting a third party with the delivery of property, or entrusting a lawyer with the distribution of an inheritance to the heirs after the decedent’s death.

In these situations, we must rely on third parties who act as intermediaries. This could be a friend, a lawyer, or a notary public, who—in more formal matters involving the transfer of a sum of money or property to a third party—charge professional fees for their services. This entails not only additional expenses but also placing trust in the fact that the contract will be fulfilled.

Now, what would happen if these intermediaries were no longer necessary? This was the idea of computer scientist Nick Szabo when he created the smart contracts, which are implemented digitally and encoded in such a way that no third party is required to execute them. In this new digital age, where the latest trend revolves around blockchain and bitcoin, we will now take a look at the smart contracts.

The Origins… How Did Smart Contracts Come About?

To discuss the origins of the smart contracts, it is first necessary to understand the new technologies that are gaining ground in today’s world: blockchain and cryptocurrencies. While there are quite a few articles that discuss these concepts and how they work, a brief overview of these technologies is still worthwhile. In fact, it is necessary to understand how these new types of contracts work.

Nick Szabo developed the concept of smart contracts almost twenty years ago, but he did not yet have the technological infrastructure needed to implement the idea. His goal was to bring contract law into the digital realm, which would enable e-commerce without the usual paperwork involved in a contract. But for this to happen, a platform for programmable transactions and a financial system that would recognize them were needed. In 1997, neither the platform nor the financial system in question existed yet.

However, in 2009, cryptocurrencies emerged—which are simply a digital medium of exchange. The first cryptocurrency to begin operating was “Bitcoin” (a virtual currency), which emerged in the wake of the economic crisis with the goal of replacing traditional currency. It functions as a currency and ensures the security, integrity, and balance of financial statements.

“Blockchain,” for its part, originated with Bitcoin, which underpins the entire structure of this phenomenon. Blockchain is a shared (online) database used as a ledger for transactions. It’s similar to an Excel spreadsheet or a general ledger where a company’s transaction entries and exits are recorded. In this database, information cannot be deleted, altered, or modified—only new records can be added. It is quite secure, and because the information is encrypted, anonymity is guaranteed. According to the World Economic Forum, it is estimated that 10% of global GDP will be stored on the blockchain by the year 2027.

Against this backdrop, the concept of smart contracts It functions as software that, through blockchain technology (which, as mentioned earlier, records all transactions—including the names of the parties involved, key dates, amounts of money, and transaction details)—uses and records this data in a smart contract. With this data and the appropriate programming, the contract executes automatically. For example, in a traffic accident, the parties involved would be linked to their insurers, who trigger the order to verify that an accident has occurred, and through a smart contract (which contains all the necessary information), the incident would be processed and the bank would be notified—the bank would also be connected to the blockchain—and the corresponding penalty would then be paid.

What are smart contracts?

A contract is an agreement between two or more parties, subject to the laws of the applicable jurisdiction. In most cases, if one party fails to fulfill its obligations, the intervention of a lawyer and the court is required to enforce compliance. This involves costs and time for the parties. The smart contracts They do not alter or add anything to the contract itself; rather, their aim is to reduce costs during the execution phase in the event of noncompliance.

The idea behind the smart contracts It involves doing away with intermediaries (arbitrators, lawyers, judges) and ensuring that contracts are self-executing, autonomously and automatically. This would simplify the process and reduce costs for the client, while also effectively ensuring compliance with the contract. In this scenario, then, it would no longer be necessary to seek the assistance of a lawyer.

But… how do they actually work?

Smart contracts contain computer code written in programming languages. The terms of the contract are simply statements and commands within the code that makes up the contract. They do not rely on authorities or intermediaries for execution, and because they are based on the blockchain mentioned above, the contracts become code that is visible to everyone. This ensures that there is no fraud or interference by third parties seeking to alter the information. Since this is a system that is being implemented gradually over time, for the moment the smart contracts They can only be applied to transactions involving digital goods (delivery of goods, sale of tickets, etc.)

Returning to the example given at the beginning, let’s suppose that in a soccer game, Juan bets a certain amount on Team A to win, and José bets the same amount on Team B to win. The contract would take the form of a smart contract. The software would verify that both parties have the funds available and would hold that amount until the contract is fulfilled. Once the game is over, the winner would be determined, the wagered amount would be awarded to the winner, and the contract would be settled.

What are some possible applications?

The smart contracts There could be several applications. For example, these contracts could be used for loans. Information regarding property collateral could be stored within a smart contract on the blockchain; if the debtor fails to make a payment, the digital keys granting access to that collateral could be automatically revoked.

They could also be used in cases of inheritance and gifts. These would take effect, for example, once the recipient reaches the age of majority. This would apply if one wishes to transfer ownership of an asset on a specific date or when certain conditions are met.

Currently, one of its functions is the use of “multisignature,” which requires two or more parties to approve a transaction before funds can be released or any other aspect of the contract can be executed.

Advantages and Disadvantages.

As mentioned earlier, a major advantage of the smart contracts The point is that intermediaries and the payment of their respective professional fees would no longer be necessary. Furthermore, the contract would not be subject to delays in meeting the stipulated completion deadline, since the process is carried out automatically.

Thanks to blockchain, the contract is recorded and stored on the network. This prevents the document from being lost or stolen, which could happen if the contract were printed out.

Now, although the smart contracts While this would greatly facilitate the processing of transactions and reduce costs, there are still obstacles that hinder the full realization of this technology. As we noted, the information recorded on the blockchain cannot be deleted or modified. In other words, once the contract is signed, it is not possible to make amendments, even if the parties agree. The program would execute automatically, in accordance with the original terms.

The lack of legislation in most countries is also an obstacle to implementing this system; without legal backing, the parties become skeptical about using new technologies.

So, finally… no more lawyers?

Although the idea of a world without lawyers is the dream of the vast majority, it remains a utopian notion—at least for now. It is true that the smart contracts While they would eliminate those intermediaries for the contract execution phase, the drafting and interpretation of the contract still require legal experts—lawyers.

However, bridging the digital and legal worlds represents an evolution in the legal field. This new contractual framework will undoubtedly transform the business landscape and society as we know it; it will substantially benefit companies, primarily by saving them the millions in costs currently incurred when entering into contracts.

There is still much to analyze about this new system, but it already gives us a glimpse of the future that lies ahead; technology is constantly evolving, and we must not fall behind. In light of this new reality, it is important to remember the words of Albert Einstein: “It has become painfully obvious that our technology has surpassed our humanity”; Let's hope that's not the case.