The origins of contract law can be traced as far back as 2250 BC in Mesopotamia. For most of its history, it has barely changed. Blockchain has surprisingly disrupted the foundations of contract law more than anything else in the past four millenniums.
Blockchain technology was originally intended to authenticate bitcoin transactions. In 2008, when Satoshi Nakamoto deployed the technology behind blockchain, few people expected that it would have any relevance outside of the cryptocurrency market. They certainly couldn’t have predicted that it would play any role in contract law.
Smart contracts are online agreements that are processed with digital authentication systems and stored on a data server. They have made agreements simpler and minimized the risk associated with losing records of the agreement. However, smart contracts are not without their own limitations. The good news is that blockchain has helped address some of these pitfalls.
Here are some of the reasons that blockchain has improved smart contracts.
Preventing unscrupulous users from exploding smart contract loopholes
Security vulnerabilities have created legitimate concerns for certain types of smart contracts in the past. The fiasco with the Decentralized Autonomous Organization is one of the prime examples. Deloitte writes that the problem could have been averted if blockchain was used to manage the smart contracts.
The organization was launched with $150 million worth of crowdfunding investments. Less than a month after the platform was launched, a hacker discovered a loophole in one of its smart contracts. They exploited this flaw, which allowed them to profit at DAO’s expense. Since the system vulnerability wasn’t discovered through a typical hacking methodology, no actual laws were violated, leaving DAO with little recourse.
This issue could have been avoided with a highly secured blockchain solution. If the contracts were secured with blockchain, the hacker would not have been able to discover this loophole.
Cutting the costs of contract administration
The administrative costs of storing and managing contracts can be expensive for many large organizations. Even contemporary digital contract management tools have their own bottlenecks and inefficiencies.
Accenture has found that blockchain can significantly reduce these costs. They report that, for the investment banking sector, merging smart contracts with blockchain technology can reduce costs by up to $12 billion a year. The cost savings are due to a number of factors, primarily by drastically reducing the labor costs associated with managing them.
Better forensic counter measures against fraud
Forgery is a serious problem in even reputable industries. According to one study, 85% of banking representatives illegally signed documents on their managers behalf. While this isn’t as egregious as outright fraud, it underscores the unscrupulous attitudes that some parties have while signing documents. After the study was conducted, but the experts believe that contract fraud was higher than previously estimated. This is one of the reasons that they are pushing for financial institutions to rely more on blockchain.
Blockchain has provided better controls to deter fraud. It is much easier to authenticate smart contracts that are signed through blockchain. Also, since the contracts are signed through a third-party blockchain system, it is much more difficult for either party to fraudulently induce the other into a contract.
Dzone write and blockchain developer Sebastián Peyrottdiscusses some of the protocols his team developed to use blockchain to authenticate smart contract agreements for various clients:
“Writes were a requirement for our previous system due to the way Ethereum events work. Events are special operations in the Ethereum network that can be watched by nodes. Internally, events are Ethereum Virtual Machine ops that create data that is added to the transaction when it is mined. Events do not work on read-only (constant) Solidity functions since they are added to a transaction when it is mined. This forces users of our first system to pay to generate a LoginAttempt event.This limitation forced us to make a compromise: rather than remain entirely decentralized, we added a server to handle authentication requests. In turn, this server relies on data stored in the Ethereum blockchain. However, our system does retain the ability to allow for serverless logins. We will see how that works later on.”