Blockchain Smart Contracts: Weighing the Pros and Cons

Opinion | July 12, 2018 By:

The rapid growth of blockchain technology over the past year or so has brought the concept of smart contracts to the fore. This new type of agreement is designed to ensure that the parameters of a transaction are executed as agreed and on time. Smart contracts do this using code logic written as if-then statements.

For example, funds that are to be exchanged in a deal are transferred into a digital escrow until certain conditions are met and the contract is considered fulfilled. When and if this happens, the contract immediately releases the funds to the receiving party. For example, a person selling their car using a smart contract would automatically receive money the instant legal ownership shifts to the buyer. All of this information is logged on the blockchain.

In essence, smart contracts can enshrine agreements not just into law but into code. They offer a shield against human error, duplicity, and malfeasance. Early applications of smart contract technology have focused heavily on financial transactions, and their success to date has already shown their value to the market. But investors should be careful not to view smart contracts as a silver bullet. While code is static, humans are not, and we need to be cognizant of potential pitfalls.

So what are some of the potential risks of smart contracts? I have already explained the benefits of their automatic execution. But this incorruptibility has a flipside: rigidity. As a former partner at a law firm, I know that no matter how many lawyers and experts you have, you cannot predict every possible outcome when drawing up a contract. The legal world is full of gray areas, and the binary nature of smart contracts as they currently exist makes them maddeningly difficult to adjust in unforeseen circumstances.

The most obvious risk for a smart contract is that there is a coding error. Everyone, even the most brilliant engineer, is liable to make a typo here and there. Since the overwhelming majority of people cannot read code, they are unable to audit their own smart contracts. They are forced simply to trust the skill and attention to detail of the programmer.

Even if the contract is coded properly, unexpected scenarios are bound to arise. For example, imagine a U.S.-based retailer ordering a shipment of product from a Chinese manufacturer. They enter into a smart contract stipulating that the product is to be delivered on a certain date, at which point payment will be transferred from the retailer to the manufacturer. The shipment arrives at its port of entry on time, but is held up by Customs for so long that the product goes bad. Although the manufacturer has honored its side of the agreement, the retailer did not receive the product it was expecting.

Smart contracts currently lack the flexibility to adequately deal with such a scenario. It is easy to imagine the headaches and financial pain this has the potential to cause, whether in the case of a coding error or a force majeure event like that imagined above.

The good news is that a number of talented groups are currently working to solve this problem. I believe in the transformative potential of smart contracts, and I am confident that the risks they present will eventually be alleviated. Until they are, people considering using these powerful tools should make sure they understand the risks as well as the benefits.

Amy Wan is the Founder and CEO of Sagewise, the toolkit for smart contract dispute resolution.