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  • InsideTrack
  • September 19, 2018

    Why Lawyers Should Understand Blockchains and Smart Contracts

    Blockchains and smart contracts, once mere buzzwords, are now a reality in business, legal, and other spheres. Learn how these concepts may apply to the legal future.

    Joe Forward

    block chain

    Sep.19, 2018 – Your flight is late and you missed your connection. But wait! You bought delayed flight insurance. Find your policy documents, including proof of what caused the delay (severe weather is a policy exclusion), and file the claim. Now wait for processing.

    Or better yet. Don’t do anything. You bought a blockchain-powered insurance policy. The blockchain knew your flight was late, had your policy information, and knew the cause of cancellation was not weather-related. The claim was already paid.

    The insurance policy was a self-executing “smart contract,” the same one developed by French insurance company, AXA, which offers automatic compensation to delayed travelers through a blockchain-powered product called “Fizzy.” It’s a “100% automated, 100% secure platform for parametric insurance against delayed flights.”

    A parametric or smart contract, powered by a blockchain platform, uses computer coded language to self-execute based on “if-then” parameters – if this, then that.

    “At its simplest, think of a ‘smart contract’ as any contract that is ‘self-executing,” said attorney Jeffrey Glazer, a clinical assistant professor at U.W. Law School’s Law & Entrepreneurship Clinic and partner at Ogden Glazer + Schaefer in Madison.

    Fizzy, however, is a simplified version of the “massive transactional efficiencies” that blockchain and smart contract technology will undoubtedly bring to every aspect of transactional and commercial life, in all industries, across the globe.  

    “Attorneys will play a central role in understanding, applying and incorporating this important new technology into our economy, lives and legal practices,” according to “Blockchain: How It Will Change Your Legal Practice,” which appeared in the Arizona Attorney. “If you think you will never encounter blockchain technology, think again.”

    Programmed Agreements

    In the Fizzy example, insurance policy terms are converted to code and stored on a “blockchain,” simply described as a “shared accounting ledger that uses cryptography and a network of computers to track assets and secure the ledger from tampering.”

    Joe ForwardJoe Forward, Saint Louis Univ. School of Law 2010, is a legal writer for the State Bar of Wisconsin, Madison. He can be reached by email or by phone at (608) 250-6161.

    Blockchain, or “distributed ledger technology,” underpins the cryptocurrency system known as Bitcoin. Through math and cryptography, blockchains are designed to function as decentralized, immutable ledgers that eliminate the need for intermediaries, like banks – the centralized bookkeeper needed to validate one’s financial value.

    A distributed ledger is intended to protect against the hazards in trusting a single intermediary, including the potential for record tampering or central mismanagement, but it’s also a powerful tool to link chains of commerce between business partners.

    “Trust is not established exclusively by powerful intermediaries, but through network consensus, cryptography and code,” according to an Illinois Blockchain Task Force.

    Smart contracts are built on the same blockchain technology as Bitcoin. Parties can program agreements that are self-executing – there is no need for an intermediary.

    “[I]n theory, smart contracts can be used to program all kinds of financial agreements, from derivatives contracts to auctions to block-chain powered escrow accounts,” explained a recent article in MIT Technology Review, which notes vulnerabilities.

    In the flight insurance example, say the policy agrees to pay the traveler $500 to cover the cost of the airplane ticket if the flight (FLIGHT 123) is delayed more than two hours.

    “That contract is then added to a ledger that is verified by all of the computers that make up the network,” Glazer said. “The ‘contract’ (software code in the form of an if-then statement) sits on the ledger and waits for a notification that FLIGHT 123 is more than 2 hours late; if and when that notification comes, the software executes the payment.”

    Glazer said the distributed blockchain ledger would hold: 1) the traveler’s name (encrypted); 2) the name of the person selling the insurance (also encrypted); and 3) the code that executes the contract, such as “Listen to Flight Tracker Notification; if FLIGHT 123 is delayed 2 hours, transfer $500 from 2 to 1.” The code triggers self-execution.

    “We can both connect our bank accounts to this contract and if and when FLIGHT 123 is late by more than 2 hours (which the contract knows because it is monitoring flight times and delays) my account is reduced by $500 and your account is increased by $500. There is no claims process or settlement process,” Glazer explained.

    Although this smart contract technology is still in its nascent stages, there is a surging confidence that smart contracts and blockchain technology will revolutionize commerce and global transactions, including its ability to transform the work of lawyers in all areas.

    “One of the primary opportunities for attorneys in this area is to begin to codify contract code into chaincode or smart contract instruction language. The number of agreements needing chain-‘codification’ could be enormous,” wrote authors in Arizona Attorney. They note that Arizona became one of the first states to adopt smart contract legislation.

    Smart Contracts: It’s Only the Beginning

    “Smart contracts are like the Showtime Rotisserie,” Glazer says. You just “set it and forget it.” They could eliminate the need for active monitoring by a human. In the Fizzy example, the insured makes no claim to the insurance company, and it doesn’t involve an investigation process by the insurance company to check the veracity of the claim.

    “It does require a trusted device that monitors the event (in this case, a computer program that monitors publicly available flight tracking information used by flight control and airlines). In industry slang, this device is called an ‘oracle,’” Glazer said.

    Again, blockchain technology is still in the early stages. But large companies are actively exploring, investing in, and using blockchain technologies, including smart contracts, to streamline their businesses. Just check out this video on Hyperledger from IBM, which illustrates and explains a multi-peer blockchain of market participants.

    One problem, Glazer said, is the lack of software developers to program and code smart contracts to blockchain applications, a void lawyers can fill. And experts say “chain-coding” for smart contracts presents an opportunity for law firms.

    “Capturing jury-hardened, IP-protected, contract code and embedding it into executed instructions in applications supporting business processes will allow law firms to create lucrative revenue streams,” according to the Arizona Attorney article.

    “In addition to annuity revenues, there is a great opportunity for savvy firms that will translate contractual language into embedded chaincode or contract code.”

    A number of law firms, technology, and other partners are running a smart contract consortium called the Accord Project, aimed at developing a common platform for smart contracts. OpenLaw, co-founded by a law professor at Cardozo School of Law, is a “block-chain based protocol for the creation and execution of legal agreements.”

    In recent months, several legal commentators have questioned whether smart contracts will replace the work of lawyers. Glazer says smart contracts will likely force changes in how lawyers perform their work, but they won’t eliminate the necessity for lawyers.

    “Practically, these developments, along with AI (Artificial Intelligence), mean that junior associates will no longer draft contracts and dig through depositions,” Glazer said.

    “They will program contracts and create search algorithms. In some senses, this is already true; ask any associate that does email discovery today at a large law firm.”

    Lawyers will still work with clients to understand, synthesize, and guide their relationships, but they should understand the impacts of the technology, Glazer said.

    Glazer said more law schools should teach programming basics, such as software structure, design, and modularity. U.W. Law School offers a clinical capstone course on the implications of advanced technology in business and law, Glazer noted.

    “Like all change, blockchain presents an opportunity and a threat to practicing attorneys.  Those who get in front of the technology and understand it will be at the forefront of the changing technology-driven legal landscape of the 21st century,” according to the authors of “Blockchain: How It Will Change Your Legal Practice.”

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