Smart Contracts Photo: Shutterstock

Coder and IT-professional-turned-lawyer Amir Azaran wants to set the record straight: “Smart contracts are not contracts in the legal sense. They are not drafted by lawyers; they are written by computer programmers—they are software,” he said at the CDX Academy Blockchain Brand Innovation Summit in New York.

Azaran, a partner in Loeb & Loeb's advanced media and technology practice, explained that while smart contracts can automate the execution of contract terms and transactions, the technology isn't likely to replace transactional attorneys any time soon.

“Smart contracts at the end of the day can really lower transaction cost; it eliminates the inefficiency of two parties having their own records and teams to enforce the deal,” Azaran said. But to execute terms automatically, these contracts “require triggering conditions which need to be objectively verified.”

What's more, smart contracts aren't applicable in every situation. For instance, a smart contract would have an easy time moving funds to a designated account when a stock hits a specific price. But when you get into more complex supply-chain situations, it's a different story.

Consider, for example, a smart contract that was employed to release funds when a delivery arrived at a certain location. To objectively verify the delivery, it would need to rely on a slew of interconnected and potentially expensive technology. “If a delivery truck delivers a crate, you need to set up an RFID system and the other necessary software to record that to the blockchain, and that can include some upfront costs,” Azaran said.

Azaran explained that smart contracts will only be useful in situations where a term can be measured in definitive ways. But many contracts are written with vague terms to provide flexibility to parties. As an example, Azaran pointed to service level agreements.

“With a lot of service level agreements, a service provider will agree to handle a bug [in software] within a certain amount of time and use 'reasonable efforts' to resolve the bug. But it's difficult to get a service provider to commit to a fixed period of time because the bug is unknown,” he said.

Still, there is little downside to smart contracts when they are used within limited, well-defined channels and between a restricted numbers of parties. Azaran calls these channels “permissioned blockchains,” which he defines as “a blockchain ecosystem that is open only to a discrete set of participants that enables a consortium of participants to solve a particular business problem or set of inefficiencies in their ecosystem.”

For corporations, such a permissioned blockchain system is an attractive prospect, especially in automating supply chain management. “Right now, 20 percent of all transport costs is administration, and if a lot of the hand-offs are just automated, you're going to see lower costs and faster [transport],” said Kate Merton, head of Johnson & Johnson's JLabs tech incubator, at the Blockchain Summit. She added that supply-chain innovation is one of the uses of blockchain her company is currently examining.

Another speaker at the summit, Laurie Tolson, chief digital officer at GE Transportation, noted that such supply chain automation is dually beneficial for a company's bottom line and customer relations. “I think the consumers are going to start seeing the impact quite quickly.”

But she added that while such permissioned blockchain consortiums are a way forward for smart contracts, they should be developed with an eye toward creating an even larger network in the future and not just isolated communities. “I thinks standards have to come out,” she said. “Without types of standards there will be a bunch of ecosystems that will be popping up, and they won't be able to communicate which each other.”