Smart Contract Photo: Shutterstock

The promise of smart contracts, which automatically execute their terms on the blockchain without need of intermediaries, has caught the eye of many in the legal tech industry. But before such contracts can go mainstream, they have to fix a glaring problem: security lapses being easily exploited by cybercriminals.

Some investors, however, believe a recent legal tech startup has the answer. Sagewise, which markets itself as a “safety net for smart contracts,” recently closed on a $1.25 million funding round led by Wavemaker Genesis.

The startup was founded by Amy Wan, a securities transactions attorney who has worked in the U.S. Department of Commerce, and Dan Rice, a software engineer and founder of several blockchain and financial technology (fintech) companies.

Wan, who also founded document assembly legal startup Bootstrap Legal, came up with the idea behind Sagewise in fall 2017. She realized that initial coin offerings (ICO) were being targeted by cybercriminals, who would hack the smart contracts used to transfer funds.

“Every week there would be an ICO that got hacked for $2 million or $3 million, and the founders would shrug their shoulders and say, 'Oh well, this is how it works,'” Wan said.

Wan and Rice developed Sagewise, which aims to launch in fall 2018, to combat smart contracts' security vulnerabilities in a few different ways. For one, the startup offers a “smart contract notification monitoring tool that alerts you when your smart contract is about to execute,” Wan said. Such alerts could help prevent unauthorized transfers of funds.

In addition, Sagewise also has a software development kit, which is a set of software tools that work to essentially freeze the contract and prevent it from executing. This ability may be necessary when trying to fix any flaws in a smart contract or settle disputes that may have arisen if the contract executed incorrectly.

The last part of Sagewise's offering is a dispute resolution marketplace, where Wan said parties can choose from a number of services to help them settle their differences. These include automated dispute resolution bots for disputes involving nominal amounts of capital, traditional arbitrators and mediators, and “crowd juries,” which are crowd-sourced pools of jurors that have become popular among those operating those in cryptocurrency space.

Though many ICOs rely on smart contracts, and many organizations are pushing to develop this market, these types of automated contracts are still some time away from being used broadly in industries like legal. “I think we are very early on, and smart contract technology is very nascent,” Wan said.

But she added that part of the reason she launched Sagewise was to help the smart technology market mature. “The reason why smart contracts aren't more widely adopted today is because there are these gaps that no one really has addressed,” she said.

Whether the services Sagewise offers will make those in legal more willing to adopt more smart contracts, as opposed to just those in the ICO and cryptocurrency space, remains to be seen. But it may be a positive sign for the smart contract market that some legal entrepreneurs are looking to address security issues that may hinder its future growth.