Smart contracts, together with Distributed Ledger Technology (DLT), were touted as advancements that would herald a complete revolution in many well established industries such as finance, insurance, real estate, legal and much more. Many technologically-savvy industry insiders even went as far as saying that the proliferation of smart contracts could replace some of the oldest professions, such as lawyers and notaries. How much of this is true, and has the technology advanced since its initial hype three years ago?
To begin with, understanding exactly what a smart contract is, together with its strengths and limitations is crucial. Smart contracts are essentially pieces of code, or programmes, that run on a DLT, such as blockchain. By design, blockchain is an immutable, transparent and a secure data source. Blockchain technology in and of itself brings trust in the data storage without involving a third party. Moreover, a smart contract brings trust to the code that is running on top of the blockchain. What this means is that code may be written and placed on the blockchain, which is self-executing once certain pre-defined triggers have, or have not, been met.
Johan Zammit - CEO of Smart Studios
Founder and CEO of Smart Studios, Johan Zammit, explains smart contracts by using a simple analogy: vending machines. “Why a vending machine? When you consider that in reality, smart contracts are neither smart nor really a contract as we normally define it in legal terms, a vending machine is the perfect analogy.
“When purchasing from a vending machine, you have a look at what you’d like to drink – say a can of coke which is positioned in slot ‘A2’. You key in A2 on the vending machine keypad, pay the price and the machine gives you the drink you’ve chosen. This is all that a vending machine is programmed to do. It executes the trade, it does it exceptionally well, but it cannot do more.
“Smart contracts work in the same way – they are powerful through the self-executing trait and the user has a very strong assurance that it will run as planned.”
Priscilla Mifsud Parker, Senior Partner at Chetcuti Cauchi
Asked about the proliferation of smart contracts in specific industries, Priscilla Mifsud Parker, Senior Partner at Chetcuti Cauchi, points towards the insurance industry and the use case of commercial flight delays.
“A smart contract for insurance may cover, for instance, that if my flight is delayed by more than three hours, I am entitled to receive a claim payout. The airport flight information would feed into the smart contract and two outcomes may occur. If the flight leaves on time, or with less than a three-hour delay, then my insurance contract expires.”
“If the plane has not yet left after three hours, then my claim is instantly activated, approved and paid out to me, without any human intervention. I do not need to submit a claim, nor does the insurance company need a human administrator to process the claim. This means that it becomes possible to issue ‘micro-insurance’, or to cover events that would otherwise not be worth insuring.”
When speaking about the use of smart contracts across various industries, Dr Mifsud Parker is quick to point out that one must bear in mind that smart contracts run on DLTs, which very much falls under the category of an emerging use of technology.
“This means that while there are countless use cases for smart contracts, there remain other aspects surrounding smart contracts that need to develop further, not least of which are development glitches, common standards across different platforms and a wider acceptance by companies and individuals.”
“Beyond that there are legal issues that need to be considered and legal systems need to adapt to a new world order. In the example above, what happens if my insurance claim is paid out because the flight info showed a three-hour delay, yet the information was incorrect and my flight actually left within three hours?”
Ian Gauci, Partner at GTG Advocates
Ian Gauci, Partner at GTG Advocates, Afilexion Alliance and Caledo Group, who also provides consultancy services on legal matters related to blockchain technology, smart contracts and cryptocurrencies, delves into why there has not been a wider uptake of smart contracts.
“Apart from lacunas and problems on adequacy from the legal point of view, there are also technology-related issues. From this angle, the inadequacy of smart contracts to deal with complex and multi-layered scenarios as well as the security and robustness of the underlying code could be some of the major obstacles.”
To highlight a positive attribute, Dr Gauci points towards how “using smart contracts instead of traditional ones, in certain instances, reduces the transaction costs significantly. Moreover, smart contracts can be applied in different industries and fields such as smart homes, insurance, e-commerce, real estate and asset management,” he adds.
This is an excerpt of an interview which was carried in the June edition of Blockchain Island.