OPINION: Are Dumb Contracts Better Than Smart Ones?
As organizations get closer to deploying distributed ledgers in production environments, it is only a matter of time before smart contracts start to appear.
A smart contract is a set of code that sits on top of a distributed ledger and automates transactions based upon data stored within the distributed ledger.
For example, a smart contract could transfer funds from Party A’s account to Party B’s account at the first of every month for the duration of the contract as long as all of the requirements of the contract are met.
If done correctly, smart contracts could simplify tasks like asset servicing considerably.
However, this automation raises a serious question: How smart should smart contracts be?
The first few generations of smart contracts should not be too smart or too long in their duration.
One of the first things parties looking to create a smart contract will discover is that computer code cannot handle vagaries like the written language.
Once parties implement a smart contract, the smart contract will operate as written. Unless the parties agree to include an escape hatch, which would include all the parties to amend the smart contract, the contract might as well as be carved in stone.
Also, the longer and more complex the smart contract’s code is, more likely coding errors could sneak into the smart contract.
Joshua Ashley Klayman, of counsel in the financial and projects group at Morrison Foerster and who participated in the recent Blockchain for Wall Street conference, suggest that as much as is possible, such as the governing legal jurisdiction, be defined in a written contract and keep the smarts of a smart contract to a minimum.
The initial smart contracts also should not be in effect for that long.
Since they are computer code, the parties to the smart contract and whoever hosts the contract will need to maintain the necessary code for the duration of the contract.
That means firms will need to create an archive of the smart contract coding platform and all of its incremental releases for possibly the next 20, 30, 50, or 99 years.
Given how quickly technology evolves, is adopted, and is eventually abandoned for something newer, better, and cheaper, this could prove to be a significant limiting factor the adoption of smart contracts.
Faulty 'smart' contracts could cost Wall Street millions, if not more.
A new working group and position paper spur a standards discussion for smart contracts.
What can Wall Street Learn From the DAO hack?
Although distributed ledgers act as a bridge between organizations, don't discount what they can do for a single firm.