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Information & Communications Technology Law
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Contract law 2.0: ‘Smart’ contracts as the
beginning of the end of classic contract law
Alexander Savelyev
To cite this article: Alexander Savelyev (2017) Contract law 2.0: ‘Smart’ contracts as the
beginning of the end of classic contract law, Information & Communications Technology Law, 26:2,
116-134, DOI: 10.1080/13600834.2017.1301036
To link to this article: http://dx.doi.org/10.1080/13600834.2017.1301036
Published online: 07 Apr 2017.
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Contract law 2.0: ‘Smart’ contracts as the beginning of the end
of classic contract law
Alexander Savelyev
a,b
a
Faculty of Law, National Research University Higher School of Economics, Moscow, Russian Federation;
b
IBM Russia/CIS, Moscow, Russian Federation
ABSTRACT
The paper analyzes legal issues associated with the application of
existing contract law provisions to so-called Smart contracts,
defined in the paper as ‘agreements existing in the form of
software code implemented on the Blockchain platform, which
ensures the autonomy and self-executive nature of Smart contract
terms based on a predetermined set of factors’. The paper
consists of several sections. In the second section, the paper
outlines the peculiarities of Blockchain technology, as currently
implemented in Bitcoin cryptocurrency, which forms the core of
Smart contracts. In the third section, the main characteristic
features of Smart contracts are described. Finally, the paper
outlines key tensions between classic contract law and Smart
contracts. The concluding section sets the core question for
analysis of the perspectives of implementation of this technology
by governments: ‘How to align the powers of the government
with Blockchain if there is no central authority but only
distributed technologies’. The author suggests two solutions,
neither of which is optimal: (1) providing the state authorities with
the status of a Superuser with extra powers; and (2) relying on
traditional remedies and enforcement practices, by pursuing
specific individuals – parties to a Smart contract – in offline mode.
KEYWORDS
Contract; obligation;
Blockchain; Bitcoin; Smart
contract
Day by day, however, the machines are gaining ground upon us;
day by day we are becoming more subservient to them;
more men are daily bound down as slaves to tend them,
more men are daily devoting the energies
of their whole lives to the development of mechanical life.
The upshot is simply a question of time,
but that the time will come when the machines
will hold the real supremacy over the world and its inhabitants
is what no person of a truly philosophic mind can for a moment question. (Samuel Butler,
1863)
The future is already here – it’s just not very evenly distributed. (William Gibson, 1993)
© 2017 Informa UK Limited, trading as Taylor & Francis Group
CONTACT Alexander Savelyev alexandersavelyev83@gmail.com
INFORMATION & COMMUNICATIONS TECHNOLOGY LAW, 2017
VOL. 26, NO. 2, 116–134
https://doi.org/10.1080/13600834.2017.1301036
1. Introduction
The beginning of the twenty-first century revealed multiple innovative technologies which
have produced a substantial impact on the new data-driven economy. The most notable
of these are: Cloud Computing, Big Data, the Internet of Things, Augmented Reality, and
Blockchain. The latter technology, initially introduced as a technological backbone of cryp-
tocurrency Bitcoin, has started to have a significance of its own. Governments and com-
panies all over the world are puzzling over the possible implementation of Blockchain
technologies in many areas of life, not associated with the use of cryptocurrency. One
of most promis ing areas of implementation of Blockchain technology is its use for creating
fully automated contracts – agreements which are performed without human involve-
ment. Such agreements in the IT-environment are frequently referred to as ‘Smart’
contracts.
2. What is Blockchain?
This is perhaps the first question which a person faces when coming for the first time to
address the issues relating to ‘Smart’ contracts. In order to answer it, one has to understand
the origin of this technology which is inseparably linked with the Bitcoin cryptocurrency,
and forms the core of its technological infrastructure.
Bitcoin was developed by an unidentified programmer, or group of programmers,
under the name of Satoshi Nakamoto, who is indicated as an author of a White paper
describing the basics of functioning of Bitcoin.
1
In the most general terms, Bitcoin can
be described as a decentralized, open-source, software-based, peer-to-peer, electronic cur-
rency. The key features of Bitcoin can be summarized as follows:
(1) Decentralized nature . Bitcoin does not have a centralized emission center or any
trusted central authority. Maintenance of the Bitcoin transactions is performed by a
network of communicating nodes running special software. From a technical perspec-
tive, Bitcoin as a currency unit is nothing more than a computer file, created on the
basis of a special algorithm processed on computing power belonging to the
Bitcoin community members. Even the Bitcoin protocol developers do not have
control over Bitcoin-related transactions. Since the relevant code is distributed on
the terms of MIT open-source license, it is available for inspection by any interested
person, and is subject to the possibility of modifications, which can become a standard
only if accepted by the majority of the community.
(2) Anonymous nature. One can use Bitcoin without any special registration or identifi-
cation procedure. It is sufficient to install a special wallet application to enable one
to initiate transactions with Bitcoin. Each wallet consists of Bitcoin units, a public
key and a private key. The private key is used for transfer of a Bitcoin unit by its
owner to another user’s wallet. Without knowledge of the private key, the transaction
cannot be signed and the Bitcoin unit cannot be spent.
2
The public key is used by
other persons to send Bitcoin units to the recipient user’s wallet, and is used by the
1
Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, p 3. < www.bitcoin.org>.
2
From a technical perspective, it is possible to state that ownership of a Bitcoin unit amounts to knowledge of the private
key.
INFORMATION & COMMUNICATIONS TECHNOLOGY LAW 117
Bitcoin network for verification of transactions. Thus Bitcoin is a pseudonymous cur-
rency, in the sense that funds are not tied to real-world entities but rather to special-
ized addresses. Their owners are not explicitly identified, but all transactions on the
Blockchain are public.
(3) Mathematic algorithm as a basis of Bitcoin value. There is no specific intrinsic value in
Bitcoin, similar to commodities with limited availability such as gold, nor is there gov-
ernmental authority (as in fiat money) behind it. However, this does not mean that
Bitcoin does not have anything backing up its value. It is backed by mathematics, cryp-
tography, and computer code. Bitcoin units are created during a process known as
‘mining’. Each person who has installed specialized software may ‘mine’ a Bitcoin
unit as a reward for solving a complex mathematical problem, associated with verifi-
cation of transactions performed with Bitcoins. The complexity of such problems is
growing, together with the amount of transactions performed in the Bitcoin
network. In other words, emission of new Bitcoin units is a result of performance of
computing activities to the benefit of the whole Bitcoin community. The overall
number of Bitcoins is defined by the protocol and amounts to 21 million units.
Since computational power is a valuable and limited resource, having intrinsic costs
(e.g. for hardware involved and electricity), and Bitcoin has limited availability,
which is ensured by mathemati c algorithms, it is possible to claim that Bitcoin has
some value behind it.
(4) Absence of single administrat or of transactions. It is a well-known fact that electronic
money is subject to the risk of double-spending.
3
Unlike physical coins, electronic
money (like any computer data) can be duplicated and thus be used more than
once. Traditional electronic money systems prevent double-spending by having a cen-
tralized trusted administrator which follows established process for authorizing each
transaction. The problem with this solution is that the fate of the entire money
system depends on the company running the administrative function, with every
transaction having to go through them, just like a bank. Bitcoin resolves the
double-spending problem by using a peer-to-peer network, and this is where Block-
chain technology plays the key role. All the transactions ever performed with all
Bitcoin units are included in a publicly available database. Information about a new
transaction with Bitcoin is distributed through the network, is verified by miners,
and then is fixed with indication of the time it was made (the timestamp) and the
unique number of the Bitcoin unit. Thus, it is possible to trace the entire history of
transactions with each particular Bitcoin unit in the database of all the transactions
with Bitcoin – the Blockchain.
(5) Resilience to data manipulations from outside. Cryptography used in the process of
creating records on Bitcoin-related transactions in the Blockchain database prevents
tampering with the content of such records and ensures their perpetual nature. When-
ever two people exchange Bitcoin units, an encrypted record of the transaction is sent
out to all other nodes in the Bitcoin network. The other nodes verify the transaction by
performing complex cryptographic calculations on the data in the record (‘mining ’ ),
and notify one another each time a new ‘block’ of transactions is confirmed as legit-
imate. When a majority of the nodes agree that a block passes review, they all add it to
3
See, for example, G Schneider, Electronic Commerce (8th edn Cengage Learning, 2008) 522 ff.
118 A. SAVELYEV
the Blockchain database and use the updated version as a cryptographic basis for
encrypting and verifying future transactions. Each block is guaranteed to come after
the previous block chronologically because the previous block’s hash would otherwise
not be known. Each block is also computationally impractical to modify once it has
been in the chain for a while, because every block after it would also have to be regen-
erated. Thus, it is not possible to rewrite information about certain transaction once it
is included in the Blockchain. Such information will be rejected by the network, unless
the intruder possessed more than 50% of the overall computational power of the
Bitcoin network.
4
As a result, all the members of the Bitcoin community have a
single version of ‘truth’, which is irreversible. Each participant to a transaction has a
copy of the Blockchain database, and this is synchronized with the others’ copies by
the use of a specialized algorithm. All this creates an unprecedented level of trust
between the users of Bitcoin, the Blockchain being the core element facilitating
such trust.
Most of the features of the Bitcoin cryptocurrency are facilitated by Blockchain technol-
ogy. Howeve r, the potential of this technology goes far beyond facilitation of decentra-
lized electronic payments. To name a few examples from other spheres, there are
existing prototypes of solutions, built on Blockchain technology, facilitating electronic
voting in the sphere of corporate governance. The Russian national payment depositary
has created a distributed database of votes, protected by cryptographic measures.
Copies of this database are stored by all the shareholders and, as developers claim,
cannot be falsified. Regulators or auditors may receive all the necessary information for
performance of supervisory functions simply by connecting to the database.
5
There are potential applications for Blockchain technology within the real estate indus-
try. Once information on the title to a piece of real estate is in the Blockchain, the owner
can transfer the property without any further interaction with the registry. Moving forward,
each new transfer of property would add to the chain of title on the Blockchain. A Block-
chain-based land registration system (in conjunction with associated business process
changes) has the potential to decrease insurance premiums.
6
Finally, Blockchain may be used for creating a new contracting environment, where the
contracts are performed, or even both concluded and performed, automatically, without
human involvement, or at least with substantially minimized involvement.
Based on the above explanation, Blockchain can be defined a decentralized distributed
database of all verified transactions that take place across a P2P-network system operating
on cryptographic algorithms. Its value can be characterized by the following two core
enablers: (1) it allows the transfer of a digital asset (or a virtual representation of a physical
offline asset) in a way that (2) facilitates disintermediation of the economy by allowing the
maintenance of truthful records about the asset owners without involvement of a trusted
intermediary (registrar, financial institution, notary, etc.). Blockchain ensures equal access
to transparent and trustworthy information. Not surprisingly, this potential is already
4
T Swanson, Great Chain of Numbers (2014) 18 <https://goo.gl/lBDVE5>.
5
CNews, NSD Tested a Blockchain-Based E-Proxy Voting Prototype (29 April 2016) <https://www.nsd.ru/en/press/pubs/index.
php?id36=629089>.
6
A Spielman, Blockchain: Digitally Rebuilding the Real Estate Industry (2016) <http://dci.mit.edu/assets/papers/spielman_
thesis.pdf>.
INFORMATION & COMMUNICATIONS TECHNOLOGY LAW 119