SMART CONTRACTS: TOWARDS A TRANSPARENT AND AUTOMATED LEGAL SYSTEM The Code of Hammurabi was the first attempt to codify the laws of a society. It was, however, an exception. For most of history, laws were oral. In the 18th century, the philosopher Jeremy Bentham warned that the oral law raised the risk of arbitrary interpretation by judges. Bentham proposed writing all the laws in the world in one big book. That great codification project was necessary for transparent justice. Time went by and the internet age arrived. In 1996, cryptographer Nick Szabo predicted that the Internet would change the nature of legal systems and proposed the concept of smart contracts. Legal contracts are written in natural language. Since this language is ambiguous, it opens the door to arbitrary interpretations. Enforcement depends on the judicial system, which is typically slow and can be tampered with. For all this, parties can never be sure that their agreement will be enforced. Smart contracts, on the contrary, are written in computer code. This code is clear and objective, leaving no room for arbitrary interpretations. Enforcement is done automatically when the predefined conditions are met. Hence, parties can have a near complete certainty that their agreement will be executed. In his article, Szabo used the example of a car purchase. Alice and Bob sign a smart contract in which Bob agrees to buy Alice's car in installments. One day Bob stops paying. As stipulated in the contract, Bob's digital key is disabled and he can no longer start the engine. The enforcement is automatic. Alice recovers her car without wasting time or money in court. How much would it have cost her to recover her vehicle with the traditional judicial route? First, get a lawyer. Second, prove that you own the car. Third, prove that you have a contract with Bob. And fourth, prove that Bob did not meet the payment. The smart contract automatically performs all these activities. Non-compliance can be verified immediately on the blockchain. Smart contracts are self-enforcing agreements. Szabo proposed smart contracts in the 1990s. For a long time, they were just an idea. In 2013, a 19-year-old Canadian called Vitalik Buterin launched the development of a new blockchain called Ethereum. It’s a platform capable of executing different kinds of programs in a decentralized way. In a sense, Ethereum is a blockchain just like Bitcoin's blockchain. A network of anonymous computers that maintain a shared ledger. Ethereum has a currency called Ether, which can be stored in a wallet and can be bought and sold, just like Bitcoin. The main difference is that Ethereum has a more sophisticated programming language, especially designed to run smart contracts. Alice and Bob sign a smart contract whereby Alice agrees to purchase a website developed by Bob. The contract is written with the logic of computer code. If Alice pays Bob 1,000 ethers before January 30, domain registration and site access keys will be transferred to Alice. The smart contract is broadcasted on the Ethereum blockchain. As soon as Alice sends the money, Bob's website is transferred automatically. All computers on the network update their ledger to establish that the website now belongs to Alice. In Ethereum, it’s possible to program a large number of business rules under the form of "if X, then Y". This can be used for making agreements in many industries. An airline could sign a travel insurance agreement with passengers through a smart contract. It can stipulate: "If the flight is delayed more than 20 minutes, the passenger will receive a compensation of $100." There’s no need to file a claim to the airline nor go to court. The payment is done automatically when conditions are met. A transport company could place a sensor to measure a number of parameters in a food container. The contract stipulates: "If temperature exceeds the predefined limit, a payment will be done to the customer." Blockchain guarantees the traceability of the process and manages the payment instantly. A few years ago, British singer Imogen Heap started to explore the application of blockchain in the music industry. She pushed the development of a platform called Ujo Music. It is similar to Google Music or Spotify, with the difference that it uses smart contracts for the distribution of royalties. When a user listens to a song, the platform directly sends the royalties to the musicians who worked in it. Since data is written on a public blockchain, transactions are verifiable by anyone. Musicians can know exactly how many times their music was played and how much revenue it generated. This scheme can also be used for distributing dividends to shareholders. A smart contract makes the payments according to the amount of shares each of them own and all this in a transparent way. The blockchain ushers in an era where agreements can be made cheaply and transparently. No matter how much money or power a party has, there is nothing she can do to tamper with the process. The contract will be irrevocably enforced. Like the Code of Hammurabi, smart contracts are written in stone.