Although smart contracts are thought to have emerged with blockchain technology, they emerged much earlier. In this article, we examined the structure of smart contracts, their creative uses today, and the regulations regarding smart contracts.
Definition and Structure
In its simplest terms, smart contracts can be defined as computer code that automatically executes all or part of a contract and is stored on a blockchain-based platform. However, smart contracts have not always been used with blockchain technology. Essentially, smart contracts emerged 10 years before blockchain technology. [1]
The most important features of smart contracts are the contracts created with "if" codes for the performance of any contract, and the automatic execution of the contract with the formation of predetermined conditions for the contract parties [2]. Thus, one of the earliest examples is vending machines. The vending machine automatically delivers the purchased product to the buyer, since conditions will occur with the payment of the price of the product targeted to be purchased [3]. Therefore, the first of its features is self-implementation.
Today's smart contracts consist of codes written on a blockchain-based platform. The contract gains the nature of a smart contract, with the terms of the contract being expressed in code. [4] Although similar to traditional contracts, smart contracts have several distinguishing features.
A contract is written by writing code for the expected result. However, since the code cannot be changed after the contract is established, the execution of the smart contract will be carried out more securely. In addition, the decentralized structure in blockchain platforms can also prevent third parties from interfering with the contract. However, the doctrine pointed out that ensuring technical reliability does not bring absolute legal reliability. [5]
Smart contracts, as mentioned earlier, are automatically executed contracts. However, automatic execution also means that the performance cannot be prevented. Therefore, even if the parties have valid reasons for not performing the smart contract, its execution cannot be prevented. Therefore, in more layered debt relations, it would be beneficial for the parties to determine the terms of the contract apart from the smart contract. [6]
At the same time, all transactions that may be related to smart contracts are carried out transparently. As the contract is located on a blockchain-based platform, the cryptographic hash values are unique and identifiable, so the transactions are carried out on a transparent basis. [7]
Finally, one of the distinguishing features of smart contracts is that the parties to the contracts do not need to trust each other. The doctrine states that the parties do not trust each other, but rather the computer algorithm secured by cryptography. [8]
The UK Law Commission ("Commission") went a step further, stating that smart contracts exist, but certain conditions may be required for them to be enforceable contracts. At the same time, the Commission stated that smart contracts can be examined in 3 different ways. [9]
First of all, it is stated that it is possible to write commands in code by writing in natural language. It has been evaluated that this contract format does not carry a legal risk in terms of interpretation and creation. On the other hand, as reported by the Commission, there are also hybrid smart contracts. Within the scope of these contracts, it has been reported that while some of the provisions of the contract can be written in natural language, some of the provisions can be written in the form of code. It has been pointed out that provisions such as natural language and applicable law can also be used. Finally, there are smart contracts that can be written entirely in code. In this case, the biggest problem arises about the interpretation of contracts and how the interpretation should be made. [10]
As can be seen, unlike traditional contracts, smart contracts are generally created with simultaneous trust and distrust in technology. It shows the feature of being an area that solves some of the problems experienced in daily life related to traditional contracts but also complicates some of the problems.
Use Cases
Over time, the usage areas of smart contracts are expanding. We also wanted to include some examples.
Firstly, it ensures that the relationship between the supplier and the seller is both more transparent and that a stronger relationship is established. Home Depot, a DIY store that sells internationally, uses smart contracts to reduce the possibility of conflicts with suppliers to zero. [11]
Secondly, Axie Games uses smart contracts in its infrastructure, with a "play-to-earn" structure, with the bridge it has built between blockchain technology and online games.[12]
There are also different usage areas in terms of smart contracts. In the doctrine, contracts for works, sales contracts, some banking contracts, copyright contracts, insurance contracts, and NFT transactions are also contracts that can be created through smart contracts. [13]
Sources
[1] Investopedia. “What Are Smart Contracts on the Blockchain and How They Work,” 2022. https://www.investopedia.com/terms/s/smart-contracts.asp.
[2] Ethereum. “Introduction to Smart Contracts | Ethereum.org,” 2019. https://ethereum.org/en/developers/docs/smart-contracts/.
[3] Çağlayan Aksoy, Pınar. Akıllı Sözleşmelerin Kuruluşu ve Geçerlilik Şartları. İstanbul: Oniki Levha Yayıncılık, 2021, sf.16.
[4] Lipton, Alex, Stuart Levi, Alex Lipton, and Stuart Levi. “An Introduction to Smart Contracts and Their Potential and Inherent Limitations.” The Harvard Law School Forum on Corporate Governance. The Harvard Law School Forum on Corporate Governance, May 26, 2018. https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/.
[5] Çağlayan Aksoy, sf.44-45.
[6] Çağlayan Aksoy, sf.48-49.
[7] Çağlayan Aksoy, sf.50.
[8] Çağlayan Aksoy, sf.54.
[9] UK Law Commission. “Smart Contracts,” 2021. https://www.lawcom.gov.uk/project/smart-contracts/., sf. 4.
[10] UK Law Commission. “Smart Contracts,” 2021. https://www.lawcom.gov.uk/project/smart-contracts/. , sf. 6-7.
[11] IBM. “What Are Smart Contracts on Blockchain? | IBM,” 2022. https://www.ibm.com/topics/smart-contracts#:~:text=Smart%20contracts%20are%20simply%20programs,intermediary’s%20involvement%20or%20time%20loss.
[12] Investopedia. “What Is Axie Infinity?,” 2022. https://www.investopedia.com/what-is-axie-infinity-5220657.
[13] Çağlayan Aksoy, sf. 66-75.
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