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Smart Contracts and legal analysis

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In recent years, we have entered a digital ecosystem at all levels of our lives: transgenic agriculture 4.0, e-learning, electronic signatures, interconnection of telecommunications networks, smart contracts, cryptocurrencies, etc., so that something has changed. In this post we want to approach the relationship between smart contracts and legal analysis.

The fact that we have been living through the electronic and digital revolution for some years now gives us, at least, the opportunity to address the perspective of a phenomenon that continues to grow and develop in society.

how have we arrived at smart contracts?

Human beings are tireless innovators, always seeking to overcome their limitations. First, it was the fax, but its barriers as a means of electronic communication led us to think of e-mail. This is where it all began. Since the 1980s, this tool has been (and still is) capable of allowing asynchronous communication between two parties (sender and recipient) to transmit messages. But its temporary errors in this exchange of information and the lack of automation led to a new idea: EDI (Electronic Data Interchange), a system that seeks a standardised grammatical structure for short text messages.

With the speed of the technological world, two revolutions emerged in 1995: web contracting (or e-commerce) and trusted third parties. The former added to electronic contracting the possibility of making B2C contracts (between companies and consumers) and using websites to show products and services to the public, among other things. Trusted third parties, on the other hand, have become true intermediaries in contracts.

As Carlos Tur Faúndez points out in his analysis, trusted third parties "constitute and design the technological platform on which the exchange of contractual statements between the parties takes place: reservation centres, marketplaces, such as eBay, or the recent intermediaries of the so-called collaborative economy, such as Airbnb or Uber. Other trusted third parties have specialised in providing proof of the content and reception of the different messages that may occur in the conclusion of a contract or throughout its life".

Electronic contracting has led to so-called smart contracts, characterised by the adoption of distributed technology (P2P model), self-execution in accordance with pre-established points, and the appearance of so-called 'oracles' to introduce conditions in contracts.

Concepts prior to smart contracts

Here are some basic concepts that will help you to better understand what smart contracts are all about:

  1. Cryptographic hash function: This can be a message of any size that is transformed into a fixed-size representation. They encrypt an input to an output and are characterised by properties.
  2. Digital signature: Two mathematically related keys: public and private. To guarantee the origin of a message, the sender signs with his private key (digital signature).
  3. Blockchain A data structure used to build distributed databases without a central authority, records are grouped into blocks and cannot be altered or deleted.

What is the anatomy of smart contracts in legal analysis?

Smart contracts are the result of technological disruption, and the use of smart contracts could be one of the most disruptive changes of recent times. Over the years, new ideas applied to traditional services have emerged, and with them new figures, such as 'insurtech', 'bitcoin' or 'crowdfunding'.

Smart contracts are part of the digital transformation of the legal field, and can establish the necessary methodologies to improve the management of legal risks to comply with the different regulations continuously over time. Article 23 of Law 34/2002, of 11 July, already established the bases of the information society and electronic commerce, stating that contracts concluded electronically would produce all the effects provided by the legal system when consent and the rest of the necessary requirements for their validity concur.

This was perhaps the starting point for smart contracts in the legal world. Blockchain technology offers us a chain of blocks capable of accrediting the existence of an agreement of wills. On the basis of this system, smart contracts can meet the elements required by the applicable regulations.

The use of smart contracts must respond to legal structures and are agreements of wills that are produced for legal purposes and obligations under Article 1261 of the Civil Code. They can provide greater security to traditional contract law and reduce the transaction costs associated with contracting.

The expectation in the legal field comes, among other things, because these contracts give us the possibility to enforce them without the need for physical intermediaries, such as judges or arbitrators. As a consequence, the legal professions must retool and adapt to the new technological demands and challenges.

AI provides legaltech with indicators to predict outcomes

This is achieved depending on the context in which such legal conflict occurs. As a consequence, the next step is for legal professionals to proceed to learn about and demystify new technologies in the legal field. They cannot become obsolete in their systems and artificial intelligence will continue to grow in the short and long term.

The technology should be seen as a strong ally of efficient practice in legal professions. Although banking is currently the sector that has made the strongest commitment to these systems, many sectors can benefit from their advantages. In short, it is capable of completely transforming the professional legal services industry, as blockchain can be applied as a document authentication service and provide a digital platform for sharing confidential information.

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