Cryptocurrency has been a mainstream topic in the media for numerous years now. Its goal to digitize and make transactions private has spurred much debate. Many commercial transactions using cryptocurrency involve a blockchain contract, which operates like contracts that people enter into daily.
A blockchain is a database shared by all parties to a transaction. The blockchain for a given transaction is stored and accessed using the parties’ computers. The database uses mathematics and software to prevent the data from being tampered with, altered, or destroyed.
Blockchain contracts are best explained using the example of a vending machine. For instance, Justin owns a vending machine that sells soda for $1.50. Caleb agrees to pay $1.50 for Justin’s soda. After Caleb fulfills the condition of paying $1.50, the smart contract would automatically take the soda from Justin and give it to Caleb. Because the contract is set up through the blockchain using secure data, this cuts out the possibility that Justin would not give up the soda once Caleb paid $1.50. So long as the condition of paying $1.50 is met, Justin’s performance under the contract will automatically be executed. Simply put, the binary nature of whether a condition has been met makes blockchain contracts efficient to execute and successful at preventing breaches of contract.
Although blockchain contracts are relatively new to the courts, these agreements will fit into contract law that attorneys dispute on a daily basis. For example, because of its written nature, a blockchain contract will satisfy the statute of fraud. Furthermore, the entire body of code will be deemed part of the contract; therefore, it provides the court with a clear depiction of the “four corners” of the contract.
Blockchain contracts, on the other hand, can create unique procedural issues for attorneys. Blockchain contracts have a processing fee the initiating party pays to the agreement. In the crypto world, this processing fee is known as “gas,” which represents compensation paid to other computers to validate the contracts before they are given full legal effect. Technology glitches and power outages are especially prevalent due to Midwest weather. If a computer cannot validate a contract, this could cause the third party who runs the authorized computer to incur liability.
If programmed correctly, blockchain contracts lower liability and reduce legal costs. However, litigation can ensue if blockchain contracts are programmed incorrectly or fail to execute to the parties’ specifications. This will cause a shift in the type of work litigators encounter, requiring attorneys to understand and argue technology law, which is likely unsettled in the courts.
From a transactional law perspective, attorneys will need to quickly absorb information pertaining to technology law and be able to write contracts that protect their clients from future liability. Since blockchain contracts are formed electronically, attorneys will need to learn how to code their contract clauses so agreements can automatically execute as soon as their conditions are fulfilled.
Blockchain contracts will likely rise in popularity in the future. Attorneys, courts, and clients need to understand the risks but appreciate the efficiency and security these agreements can provide. Erickson Sederstrom Law stays current with the shifts and changes in contract law.