The Federal Bank of Atlanta and executive director of its Centre for Financial Innovation and Stability Larry Wall released a paper on smart contracts and their potential to change traditional legal proceedings.
Wall writes:
“In many circumstances, smart contracts may eventually be a more efficient way of contracting than traditional paper contracts.”
Amid the birth of cryptocurrencies in 2009, a significant number of experts emphasized the important role smart contracts could play in establishing various sets of unalterable agreements on an irrefutable ledger.
Some argued that the integration of data onto a secure Blockchain network would allow businesses, individuals and organizations to benefit from the presence of a fixed set of agreements that cannot be changed without tampering the network.
Some cryptocurrency networks like Bitcoin which operate on a substantially high hash power are virtually impossible to breach, due to the rising number of miners and the contribution of their computing power into the network.
Inefficiency of paper contracts
Wall, in his recent paper entitled “Smart Contracts in a Complex World” explored the inefficiency of paper contracts in legal proceedings, which is primarily caused by ambiguity in the language of the law.
The majority of contracts that are formed between two parties to ensure the fulfilment of the established agreements are often incomplete, because of the difficulty in stating every possible situation where the contract can be utilized.
“Halonen-Akatwijuka and Hart (2013) observe that traditional contracts are often incomplete, even though the outcomes are verifiable, are easy to describe, and appear relevant. One example they give is that contracts often leave unspecified what happens if there is a breach of contract by one of the parties. Halonen-Akatwijuka and Hart (2013) hypothesize that incomplete contract terms may make renegotiation less costly or more efficient,” wrote Wall.
Inability to renegotiate is a problem
As such, Wall believes smart contracts demonstrate a series of major advantages of paper contracts.
However, Wall states that there two major problems with smart contracts:
- Technical and security issues (code)
- Inability to renegotiate
In his paper, Wall used the DAO hack to explore the vulnerabilities of smart contracts. Despite his accurate assessment of the DAO hack, he makes a fundamental error by generalizing that smart contracts are vulnerable.
Security Issues
The DAO, which was based on the Ethereum network, is an independent software separate from the Ethereum network. The bugs or the vulnerabilities that arose in the DAO network must be attributed directly to the responsibilities of the DAO development team, not smart contracts in general.
Thus, it is inaccurate to note that smart contracts have weak security measures using one example of a smart contract-based platform.
The future of smart contracts
In the final section of the report, Wall does emphasize that smart contracts may be a more efficient way of contracting than traditional paper contracts.
“The lesson from this discussion of the DAO's experience is not that smart contracts are an inherently bad idea,” wrote Wall.