A smart contract is a computer software code that verifies and executes itself without human agency, when a set condition is met. A smart contract makes possible, the automation of reasonable business expectations.

Origin of Smart Contracts

The term “smart contract” was coined in 1996 by Nick Szabo, at a time when the requisite tech tools were not there to make it happen. Nick defined a “smart contract” as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises”.

Not long into the future—and precisely in 2014—a blockchain-based smart contract became a tech reality. Thanks to the Ethereum Blockchain, a public blockchain now home to numerous Initial Coin Offerings (ICOs) companies, wishing to raise, or already raising venture capital on the distributed ledger, while securing the transaction with a smart contract. Quoting a source:

“Smart contracts have been a main selling point for the blockchain system called Ethereum, with which premiere financial institutions and multinational technology companies – think the IBM’s and JP Morgans of the world – have experimented. The system, developed by Vitalik Buterin, has ballooned to more than a seven billion dollar market capitalization…”.

Above is a piece of what has been achieved with smart contracts in less than a decade of the existence of Distributed Ledger Technology (DLT) which makes smart contracting possible.

Why is the Contract Called “Smart”?
Some have said that smart contract is not “smart”, because it is only as smart as the human coder. The humour here is found in the words of Nick regarding “smart”, in the context of smart contracts. Nick said:

“I call these new contracts “smart”, because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied”.

Obviously, nobody needs be told that where the legacy paper contracts are concerned, the computer software protocols called smart contracts deserve to be called “smart” (no pun intended).

A smart contract as a machine-readable contract is an autonomous contract. An example is a house electricity connected to the IoT, and built on smart contract concept, which stops itself, when subscription finishes, or starts itself, after subscription renews.

In that situation, one would not need to go physically to pay bills. One can ordinarily say that, this can be done, using a smartphone, or any other IoT-connected device that has a Decentralised App (D’App) installed. Smart contracts, like the conventional paper contracts, have numerous use cases, most of which are waiting to be explored. The tech is pretty young at this time, but it has shown a great promise. Supply chain management, digital asset sales, capital markets, land registries, government’s smart records, smart cities, and self-sovereign identifies, have all been some of the most disruptive smart contract use cases.

Smart Contract Applications

D’Apps are smart contract apps that can be made to work with Internet of Things (IoT) devices. For instance, cars, printers, trucks, wristwatches, laptops, satellites, PoS, solar panels, which are connected to the IoT, can function synchronously with smart contract protocols. Home appliances like refrigerator, washing machine, television, gas cooker and all, can be connected to the Internet of Things (IoT) devices, to make both machine-to-machine communication and interaction work efficient.

Smart property, made possible by digitising land ownership and use rights on the blockchain, whether or not IoT-connected, is one of the aspects where smart contract finds both relevance and prominence. Dubai city is building a smart city project, and has its eyes on becoming the first smart city in the world by 2020 AD. It has an ongoing deal with ConsenSys LLC and IBM to recruit, train and employ blockchain devs from all across the world, to make the smart city dream a reality at the set time.

Smart Contract Liability

Question being asked is whether smart contract coders can be made to face product liability where a smart contract failed to meet the required legal standards, which may be due to some bug in the code or sheer unknown vulnerabilities in the entire blockchain infrastructure. Smart contracts have been breached by hackers who use social engineering means like brand spoofing, or phishing, to collect customers’ data through unsolicited emails, by linking cloned ICO websites, and pasting wrong addresses for participants to send funds during Pre-ICOs and ICOs.

The above was exactly what happened last year with the Decentralised Autonomous Organization (DAO)—popularly called “The DAO” —that leads to the hard-fork in the Ethereum blockchain. Christoph Jentzsch slipped with a “smart contracting computer code”, and a known bug was exploited. A “child DAO” created, and millions of dollars in participants’ investment funds were siphoned from the system. The US-SEC in its investigation report said that the entire fund-raising project does not rise to the level of fraud, since The DAO could not continue to finish, because of the hack. It decided to not make a finding on crime commission.

Smart Contracts & ICOs

The blockchain smart contract-enabled Initial Coin Offering (ICO), as a new venture capital funding system, combines the powers of Initial Public Offering (IPO), angel investment and the entire traditional venture capital funding. A good summary of Initial Coin Offering (ICO) history showed that an ICO was first created to distribute coins to non-miners, because miners almost had an exclusive control of coins. Starting with the first ICO, Karmacoin, April 2014, and the first token sale, Mastercoin, July 2013, the space has grown in leaps and bounds. The number of tech start-ups and known traditional companies cropping up everyday, raising start-up capital and investing in the blockchain industry, is staggering. With a well over USD1billion raised in start-up funding in the first quarter of 2017 through ICOs and DLT token sales, mad rush on the space, and the 61% Compound Annual Growth Rate (CAGR),  projection into 2021, for the entire blockchain ecosystem, the State-parties have set on their eyes lately.

US-SEC investigated the DAO, over its ICO project, and ruled afterwards that the US federal securities laws apply to an ICO company, or a virtual organization henceforth, if they issue virtual coin or token that passes as a security. Passing the Howey Test means that where an ICO company  enjoys no exemption, it must register its offer and sale of virtual coin and token as securities, and thus come within the purview of the US federal securities laws.

The Singaporean SEC followed suit, and like the US-SEC before it; ruled that virtual organisations raising start-up capital, are caught by the securities laws of that country. South Korea threatens to “punish” start-ups raising capital through this both attractive and innovative way of funding. China, a big player in the cryptospace, weighed a very heavy banhammer and descended on ICOs.  Obviously, most countries do not have any “specific regulation on this method of token sale” at the moment, since this novelty falls clearly outside the legacy framework. As the whirlwind Blockchain Revolution roils and rolls on, our world would wake to the realities in no time.

Boulevard A. Aladetoyinbo, Esq.

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