Koumentakis

Tag: smart contracts

  • Smart Contracts and Businesses

    Smart Contracts and Businesses

    I. Preamble

    “Verba volant, scripta manent” (: “spoken words fly away, written words remain”) Romans used to say.  It is similar to a Greek saying, roughly translating: “when there is something in written, no one can dare question it”.  Both phrases obviously refer to the need (our need) for written proof of what is agreed upon.

    This Greek saying depicts the “relationship” between the older among us and written documents entailing what is agreed upon. And, also, the insecurity the absence of written documents brings along.

    Most of us grew up having well engraved in our subconscious the need to “hold” tight a “piece of paper”, usually proof of an agreement, a trait or a title.

    Different times back then.

    Different times indeed! But the “engraving” in our subconscious is, more or less, still somewhere there.

    Today, in the age of technology, tangible documents have started to, gradually, lose their value.

     

    II. Smart…

    Smart phones, smart house, smart appliances, smart car, smart factory…

    The use of the adjective “smart” is getting wider by the day. We could say that it gives a new meaning to traditional concepts. Especially in the context of the 4th Industrial Revolution and the technological leaps that come with it.

    This is where we also stumble upon “Smart Contracts”. But this is not a new term or concept. The discussion on smart contracts had already begun in the mid 90’s.

     

    III. A little bit of history

    Nicj Szabo, in his early youth, made some exceptional choices and investments in himself. He chose to study law, informatics and cryptography. This combination is, to this day, remarkably innovative. Even more so for his time. Those specific studies gave him the ability to make a double (but simple in its content) ascertainment: (a) human societies are structured around the use of paper-documents as means of proof of an agreement, an event, a certification, and that (b) it was (technically) possible to  change that, by using computer software -“protocols”, to be more precise.

    Based on those, he highlighted the potential to utilize a wide variety of new protocols.  Their Purpose?

    (a) the digital registration of promises/commitments of both parties – he called this registration “smart contracts”,

    (b) the monitoring of whether the requirements set were met, and

    (c) the automated execution of the obligations the contracting parties undertook (both in case the requirements were met or in case they were not)

    The vending machine is considered to be an ancestor of smart contracts. Their early forms: ATM and POS machines.

     

    IV. The characteristics and applications of Smart Contracts

    Nick Szabo defined smart contracts as a computer trading protocol (in the form of: “what will happen if…”), which allows for an automated execution of the terms of a contract.

    But the conversation regarding smart contracts spread during the past few years. And this is due to the opportunity which arose, to combine smart contracts and blockchain technology.

    This technology is practically what made smart contracts possible. We already saw that smart contracts are nothing more than a program code. When the conditions that have been agreed upon are met, then smart contracts can self-execute. The clauses and the terms of the contract are registered in the code. The code then verifies whether they were delivered, or it detects any violation that may occur. Finally, it automatically executes what has been agreed upon, taking into consideration whether the agreed upon clauses and terms where delivered. Every movement, every term of the contract that is kept or violated is registered in the blockchain, rendering the data unchangeable and unquestionable.

    Therefore, smart contracts are completely safe. Consequently, more useful.

    This is why their use by businessmen and businesses is widened. And not just by them.

     

    Smart contracts and blockchain

    While approaching blockchain technology from the business perspective we ascertained that:

    “…Smart contracts can most effectively operate in a blockchain environment. Smart contracts are concluded between two or more parties, but they are not reflected on pieces of paper. They are “written” and “signed” digitally by the contracting parties, in encrypted algorithm software codes.

    They are self-executed contracts and contain terms agreed upon by the contracting parties. It is obvious that businesses can replace most, if not all, contracts (i.e. employment contracts) with a smart contract.

    The usefulness of smart contracts has proven (and will be further proven in the future) to be extremely important in business transactions. For example, businesses that trade with geographically remote buyers and suppliers, are able, by using blockchain technology and the traceability it provides, to certify the origin, integrity and agreed upon quality of their intermediaries or final products. Respectively, they can verify the same characteristics for products they acquire from the global market.

    It is very important to stress that any violation in a smart contract is automatically identified. Such violation cannot be disputed. The consequences of both the execution of the contract (i.e. the payment of its price) and the violation of the obligations deriving from the contract (i.e. no execution of the contract) occur immediately.  These facts lead to the rapid decrease of the cost of transactions, the avoidance of conflicts and of the necessity of extensive involvement by humans. The decrease of the relating costs if self-evident…”

    The benefits from the utilization of smart contracts in business transactions-especially in international ones are, therefore, a fact. Other possible applications are: in transferring movables, real estate, securities and rights. In insurances, healthcare, in patenting and capitalizing copyrights. In creating certificate registries, in energy. Also, in providing guarantees, exchanging and transferring money. The possible applications are literally unlimited…

    We are before an imminent, but real, revolution in transactions and contracts.

     

    V. Advantages and disadvantages…

    Smart contracts offer several of advantages. Due to blockchain’s decentralized structure, there is no need for a mediator. Instead of a mediator, there is digital trust. Every smart contract is executed securely, fast and with transparency. Exactly as agreed. There is no need for the contribution, intervention or mediation of a central authority, bank or lawyers. More precisely: a third party like that has no place. That way, the costs of transactions are significantly reduced.

    However, this new technological opportunity involves some risks.  Some of which are very significant.

    Smart contracts have already been proven inseparably linked to blockchain technology. This means that it is impossible to modify and registered information. This specific trait (as stated above) provides security and trust in the execution of smart contracts. But the same trait, viewed by a different angle, causes significant concerns.

    It possible, for example, one of the contracting parties to change their mind. In case the choice of withdrawing was not provided for when designing the code, withdrawal is not an option. At least at a first glance. The final and unchangeable code, on which a smart contract “runs”, leaves no room for error and does not allow modifications. Something like that would bring into question the above-mentioned advantages.

    It is a fact that there is no legislation on smart contracts. In contract law, there are certain rules that apply. Rules sufficient enough for managing and dealing with problems like the ones already mentioned. Given the lack of legislation on smart contracts, there is no provision for dealing with similar, potential, problems. Smart contracts have an absolute nature, which may possibly (under certain conditions) to be proven problematic.

     

    VI. Dealing with smart contracts on a legal level

    A smart contract seems to not be recognized as a contract by law. At least not yet. A contract (for us lawyers) is a promise legally executed. It can be written or verbal, explicit or silent, to be, or not, of a specific type (deed). Contracts, according to the predominant opinion, cannot be identified as the automated execution of a code. (It would be possible, of course, to present strong counter-arguments to that position- but let’s leave this discussion to take place on a scientific level).

    But exactly this lack of legislation is what makes the need of finding a way to regulate them imperative. It is a fact that smart contracts are starting to be used, replacing traditional contracts. This makes the legislation securing the rights of the contracting parties absolutely necessary.

    The questions, though, arising is very interesting: Which is the competent authority to adopt the proper legislation? And who will be competent for enforcing its application?

    The applicable law is usually chosen by the national legislative framework within which a contract is developed. Especially when it does not have any cross-border elements. However, blockchain technology favors cross-border contracts and trading. The legislative framework that will possible be created, must take into consideration the rules of private international law. The applicable law will, each time, be chosen based on those rules.

    Another issue that must be regulated, regards the execution of smart contracts. A smart contract, as already mentioned, self-executes. In case the option of withdrawal was not provided for in the first place, withdrawal is impossible. This characteristic does sound quite attractive. On the other hand, it can possibly create serious problems. And this is because there are already provisions in place (i.e. consumer law) that provide for the right of withdrawal.

     

    VII. The need for a regulatory environment – the example set by Cyprus

    In this regard, there is a project running for the utilization of Distributed Ledger Technologies (DLT) and especially blockchain. Cyprus has already issued the National Strategy for “Distributed Technologies (Blockchain)”, with the main goal being the creation of the proper environment for businesses, companies, services and investments, in order to welcome the new technologies.

    In Cyprus the relevant legislation is in the works; a legislation that will regulate those technologies. Of course, smart contracts included. They have already accepted that such a legislation must be based on the principal of technological neutrality. The regulation of the proper use of smart contracts is also expected.

    The relevant legislation about to be drafted is expected to acknowledge (and manage) the negative impacts (legal-wise) of, among others, smart contracts in Cypriot law. Among the issues expected to be tackled are the binding nature of smart contracts and its consequences.

     

    VIII. In conclusion

    Smart contracts are a true revolution in transactions. They offer safety, speed, financial advantages -and many more.

    Given those facts I will not hesitate to assume that smart contracts will gradually substitute conventional contracts. And not only that, but that they will also (sooner or later) completely replace them.

    In the not so far future, the phrase “when there is something in written, no one can dare question it” will no longer apply in contracts…

    Nick Szabo made the right choice to pair up legal, informatics and cryptography studies and he made it at the right time.

    In the following decades, legal studies will no longer suffice for a lawyer. Legal practice, clearly affected by the force of technological advancements, is rapidly changing.

    For the time being: it is necessary to speed up the discussions between the business and the science community concerning the creation of the proper regulatory environment for smart contracts.

    It is not important who will initiate the much-needed dialogue: Chambers of Commerce, Institutions, Universities or the State.

    The only thing certain is that it needs to start.

    Cyprus is already showing us the way.

    stavros-koumentakis

    Stavros Koumentakis
    Senior Partner

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (November 24th, 2019).

    έξυπνα συμβόλαια smart contracts

  • Blockchain & Businesses

    Blockchain & Businesses

    Ι. Preamble

    In 1956, American President Eisenhauer announced the US satellite program. Dr Richard Woolley, Astronomer Royal, rather hastily publicly characterized the discussions made at the time about space travel as “utter bilge!”. On 4.10.1957, the Soviet Union launched “Sputnik1”.

    Could blockchain be “utter bilge”?

     

    ΙΙ. 4IR, DLT & Blockchain

    We are at the age of the 4th Industrial Revolution (4IR). As analyzed in a previous article, 4IR emerged as the answer on how to boost production. The main idea behind it was to render factories “smart” and, as a result, more functional and effective. Soon enough, 4IR broke through those limits and started affecting most aspects of our lives.

    4IR has already blurred the boundaries between the natural, biological and digital world.

    We have already talked about the technologies constituting 4IR, among which is the Distributed Ledger Technology/DLT. As far as DLT is concerned, we came to the conclusion that it is “a database which, instead of being kept in a central location, it is distributed in a network of computers. The users of the computers with access to the network, depending on the licenses they hold, are able to access the information and/or add data.”

    We also saw that the most common DLR is the, widely known, blockchain. We understood that this “chain” “is protected in its entirety by complex mathematical algorithms, aiming to ensure the integrity and safety of the data. This chain is a complete recording of all the transactions recorded in the database. The most known application of blockchain is the creation and circulation of cryptocurrencies, as well as the accommodation of transactions entailing cryptocurrencies.” We also understood that blockchain has revolutionized the safety of transactions.

    And all that of course, even if they are hard to understand, seem (and are) extremely interesting. Especially for businesses. As long as the relevant questions are answered.

    Among those:

    What is the value of blockchain for businesses?

    How is blockchain steadily rendering itself necessary and those who ignore it irrelevant?

    Which are the opportunities to utilize it in order to achieve one’s business goals?

     

    ΙΙΙ. Utilizing blockchain

    Blockchain technology already applies in most sectors, private and public.

    Gradually, more and more businesses and organizations are considering the benefits and possible applications of blockchain in various aspects of their operations. Pilot projects are running. Some, innovators, are enjoying blockchain’s applications and advantages.

    The private sector is, at least for now, at the forefront when it comes to utilizing this technology.

    With banks leading the way (mostly). Internationally.

    Nevertheless, although hesitating at first, now steadily more and more states, public authorities, national and international organizations are coming to terms with the existence of blockchain and are starting to look forward to its benefits. With some of them already enjoying them.

     

    IV. Blockchain and businesses

    Businesses are set apart by their objects and way of operating. This is why a (possible) application of blockchain would differ, depending on the business applying it. It is a fact that businesses can utilize blockchain on many levels, thus rendering themselves innovators in their respective fields. The main goal always being turning this innovation into business profits. Blockchain can assist in this direction.

    Attaining business profits can be achieved (mainly) in two ways:

    • by incorporating blockchain in everyday operations of the business (in general or in specific aspects of its operations) -essentially by utilizing it as a business advantage.

     

    (and, as far as those who specialize in this technology are concerned)

    • by incorporating blockchain in the specialized services offered (e.g. offering advisory services to businesses for its utilization as a business advantage or offering tech support for incorporating it, as a tool, for the operation of the business).

    Given the number of possible applications of this technology, it would be impossible to try to mention all of them. We will confine ourselves to only mentioning the most important ones.

     

    V. Utilizing blockchain in business operations

    Blockchain works as a decentralized ledger. It offers disintermediation, safe and fast transactions. Those advantages have nothing to do with specific fields or objects. All businesses can benefit.

    Blockchain renders mediation and mediators unnecessary.  The relevant expenses are no longer applicable. Blockchain minimizes final costs and bureaucracy. It substantially speeds up the conclusion of transactions.

    Companies are now able to utilize blockchain for recording any data. Especially the data that they consider to add value to their product or service, as well as data verifying that said products or services originated from them. This application is available because any asset (financial, physical or virtual) can be digitalized and depicted in a blockchain ledger.

    In this regard, any business can blindly trust the data stored in a blockchain. Since data can be verified in no time, no one could really successfully claim something untrue in a blockchain world. The authenticity of a product, the country of its origin and the conditions under which it was manufactured could not be disputed in case a blockchain was used for keeping all the relevant information. The consumer, when they are confident about the criteria they used for making their choice, would much rather buy a product from a company with this “seal” than from a company without one.

    The authenticity of a certification of knowledge or of a degree is easily ascertained when the one issuing it has recorded it in a blockchain. This certification (or degree) is more prestigious and has an advantage compared to the ones not stored in a blockchain. In this regard, any employer will have no reason to doubt the authenticity of the titles submitted by a (prospective) employee, when those titles are stored in a blockchain and have a (unique and easily verifiable) “hash value”.

     

    VI. Cryptocurrencies and businesses

    Cryptocurrencies are digital currencies based on an open source software. The most popular cryptocurrency with the highest circulation is bitcoin.

    Cryptocurrencies allow for the transfer of value between transacting parties, eliminating the need for the mediation of a central authority (e.g. a Bank or a State). Being digital, those currencies do not take a physical form. All cryptocurrency transactions are confirmed by the users of the decentralized monetary system and are recorded in a blockchain. Cryptocurrencies resist inflation. And, with the technology that currently exists, it is impossible to forge them. The characteristics described render all transactions taking place with cryptocurrencies cheaper, faster and safer compared to transactions that take place using traditional currencies and payment networks.

    In general, most of us had a negative reaction when we first heard about the use of cryptocurrencies. The facts that those currencies are not issued by any government authority and they do not correspond to any other asset were enough. Additionally: they cannot be deposited in any bank, which would in turn verify their existence and ownership status. And besides, it was common knowledge that transactions conducted with cryptocurrencies where “shady”: either completely illegal or not so clearly legal.

    Cryptocurrencies are still treated with caution, maybe even fear. Ignorance is what will lead one down that path.

    Nonetheless, it is a fact that businesses can benefit on many levels from the use of cryptocurrencies. Some are already benefitting. In reality, there are many wallets holding a considerable number of cryptocurrencies. The ability of some businesses to transact with the owners of those wallets is already giving the first an advantage compared to their competition.

    The number of businesses accepting cryptocurrencies (mainly bitcoins) in our country is increasing rapidly. What is more interesting is the range of services and products offered. One, for example, could easily receive services offered at vehicle roadworthiness centres, web hosting services or services offered by a lawyer or a dentist and pay for them in cryptocurrencies. It is as easy for someone to buy toner, medical equipment and/or medicine from a drugstore and pay in bitcoin. Also, to pay off tuition fees to the University of Nicosia.

    A simple search at the world wide web gives the full picture.

    Regardless of a business’s day to day operations (sale of products, offer of services, profit-making) cryptocurrencies can be of a significant value when pursuing the corporate goals. Through, for example, a process of raising funds. And that, in some cases, may be more important.

    A business’s need for capital support can arise either at the stage of the establishment of a company or during the time it operates. It is well known that, on a national level, there are several platforms getting perspective investors and interested companies in touch.

    Cryptocurrencies offer companies the ability to raise funds (with incurring close to no expense and really fast) from international investment pools. Using blockchain and cryptocurrencies, crowdfunding no longer needs a third party to mediate investments.

    And even more so: businesses can raise funds that are useful for their operation, via issuing their own digital coins.

     

    VII. Smart contracts and businesses

    Smart contracts can most effectively operate in a blockchain environment. Smart contracts are concluded between two or more parties, but they are not reflected on pieces of paper. They are “written” and “signed” digitally by the contracting parties, in encrypted algorithm software codes.

    They are self-executed contracts and contain terms agreed upon by the contracting parties. It is obvious that businesses can replace most, if not all, contracts (i.e. employment contracts) with a smart contract.

    The usefulness of smart contracts has proven (and will be further proven in the future) to be extremely important in business transactions. For example, businesses that trade with geographically remote buyers and suppliers, are able, by using blockchain technology and the traceability it provides, to certify the origin, integrity and agreed upon quality of their intermediaries or final products. Respectively, they can verify the same characteristics for products they acquire from the global market.

    It is very important to stress that any violation in a smart contract is automatically identified. Such violation cannot be disputed. The consequences of both the execution of the contract (i.e. the payment of its price) and the violation of the obligations deriving from the contract (i.e. no execution of the contract) occur immediately.  These facts lead to the rapid decrease of the cost of transactions, the avoidance of conflicts and of the necessity of extensive involvement by humans. The decrease of the relating costs if self-evident. Lawyers lose business, which is good for businesses…

     

    VIII. Blockchain technology as a business activity

    Many people claim that blockchain is a technological revolution more significant than that of the internet. It is a revolutionary technology, which full potential is yet to be discovered. And while its use is steadily, day by day, established, this technology has existed only for a few years. And just like anything new, it has a lot of room for improvement and development. A great number of sectors are suggested as sectors to which this technology could contribute significantly.  Just to name a few of these sectors, blockchain could contribute to the economy, medical care, supply chains, education, creative industries and copyrights, transportation, maritime and energy (areas described in the European Parliament resolution of 3 October 2018 on distributed ledger technologies and blockchains: building trust with disintermediation (2017/2772(RSP)).

    So, it is certain that the businesses that will get involved in utilizing, improving and expanding this technology will be looking towards a more promising future.

     

    ΙΧ. The example set by Cyprus

    Blockchain technology cannot function on its own. It might cause lawyers to lose part of their business, but other occupational sectors will benefit significantly. Blockchain requires technical infrastructure and skilled personnel.

    Nonetheless, it is very important to understand that it is absolutely necessary for the proper legislative system to be in place and functional. Cyprus is already moving towards that direction.

    The Republic of Cyprus has already announced, in May 2019, the “Distributed Ledger Technologies (Blockchain) – A National Strategy for Cyprus”. Its purpose is the optimal utilization of the potential of Distributed Ledger Technologies, of course Blockchain included. One of the actions taken is the preparation of a legislative framework for new technologies.

    The Republic of Cyprus does not stop at planning the optimal utilization of blockchain in the public sector. It goes one step further by also considering the private sector and businesses. With that in mind, the National Strategy of Cyprus, brings legislative changes in the Companies’ Act, in income tax laws as well as in the Act regarding the prevention of the legalization of income deriving from illegal activities. It focuses on passing legal provisions regarding cryptocurrencies and smart contracts.

    The National Strategy of Cyprus was drafted based on documents already signed by Cyprus. Among them: “The European Blockchain Partnership –EBP”, signed on the 4th of June, 2018. Also, the “Southern Mediterranean Countries Ministerial Declaration on Distributed Ledger Technologies”, signed on the 4th of December, 2018.

    Despite Greece being among the countries that entered the Declaration, it hasn’t yet acted on them, contrary to Cyprus, in order to ease the application of blockchain and utilize it in the best possible way.

     

    Χ. In conclusion

    Poor Dr. Richard Woolley couldn’t imagine that one year after his infamous blunder regarding space travel (calling it “utter bilge!”-1956), such travels would have become a reality. Respectively, nobody would have possibly imagined (even in the early 1980’s), what a big part of everyday life internet would become.

    No one can mock blockchain today. It is a fact that it constitutes a “revolution” more important than that of the internet.

    The (fast) adaptation of businesses to the new era appears to be necessary. The first to adapt will benefit faster and enjoy more benefits. (The rest?)

    At the same time, the establishment of a regulatory framework regarding blockchain appears necessary. The example of Cyprus is both recent and sufficiently instructive.

    Further delays will only prove harmful.

    On a business and national level.

    stavros-koumentakis

    Stavros Koumentakis
    Senior Partner

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (November 17th, 2019).

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