A smart device like a phone or TV can accept simple instructions and take all intermediary steps to provide desired outcomes with the user not having to dictate each step, because each step is already programmed into the device.
A very simple example of a “smart” machine is a vending machine. Insert money and press one button, and the vending machine automatically authenticates and counts the money, identifies on which shelf in the machine the desired soft drink is located and moves the internal guard for that location to release the desired soft drink.
Similarly, smart contracts are contracts that have multiple steps, but are set to automatically facilitate each successive step.
For example, a commercial lease of a building may have a one-year duration with automatic annual renewals if the tenant prepays the next year’s rent. Making that lease “smart” would mean creating a software program (application) that would tie into the landlord’s bank account so that once the tenant pays the next year’s rent, a lease extension agreement would automatically be created, filed with government authorities and sent to the landlord and the tenant.
In the example above, the landlord would not be able to avoid extending the lease once the tenant pays the next year’s rent. If anyone other than the landlord or tenant is involved, those people would also be precluded from committing fraud or renegotiating the terms of the transaction.
The most popular smart contracts to-date have been the suite of computer programs called blockchain. Blockchain is a programmed sequence of computer/bank account steps that each trigger the next step when the pending step is completed.
Each step of a blockchain transaction is documented by the software in a permanent, unchangeable format immediately disseminated to the world to prove that each step was undertaken in a timely and complete manner. Each blockchain can be programmed to recognize if a step is omitted or changed (if that would even be possible) and reverse the entire transaction.
Blockchain has been the preferred method for most transactions where people want to buy or sell cryptocurrency. In this context, based upon the analogy above, blockchain is the vending machine, and cryptocurrency is the soft drink.
Using a smart contract like blockchain theoretically precludes cryptocurrency buyers and sellers (who are in markets that are generally unregulated) from re-negotiating or not performing once initial payment is made.
Blockchains’ programmed sequence of steps and the permanent memorialization/documentation of each step’s completion has been perceived as being both brilliant and unbreakable. That is, until last year.
Earlier this month, a hacker pleaded guilty in federal court to a 2022 theft of over $12 million by reverse-engineering and reprogramming a smart contract for cryptocurrency. This case was the first U.S. criminal conviction for the hacking of a smart contract.
Although existing criminal laws were sufficient to get a conviction in this instance, civil and criminal laws focused specifically on smart contracts are expected in the future as smart contracts take over many aspects of business beyond just cryptocurrency.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.
