Thanks for your excellent column.
When I practiced business law in Silicon Valley clients often asked me to review a proposed commercial lease for their company’s new building. These contracts were commonly 80 or so single-spaced pages long in 10 point type.
They contained hundreds of obligations of the tenant and dozens of the landlord. Many were open to disagreement about what a party actually had to do or pay under any one of hundreds of variations of real-world situations. They were filled with analog terms like “reasonable” “timely” “promptly” and so forth.
The idea that you can transform that kind of an agreement into a digital form where each real-world event self-announces itself to a computer without human intervention as either a black or white result is beyond ridiculous.
Even in escrow situations things are not digital. I agree to sell my house to you. That contract has dozens of related obligations — physical inspection conditions, title conditions, contingencies, grounds for extending the closing date, etc. Many of those items are analog, e.g. a week before the scheduled closing the title report shows a 10 foot easement to the power company to repair a pole at the rear of the property or the right to drill for and remove minerals or water. Is that an acceptable encumbrance on title or is it grounds for the buyer to cancel the sale? And that’s an easy case.
Sure, I put the executed deed in escrow and you put the purchase price in escrow but how does the “smart contract” know whether the state of the title is “clear” or “not clear” when you get a non-digital situation such as this easement? AND, if the “smart” contract can’t tell for sure if the answer is Yes or No because what is meant by “clear title” is not an analog question, then the contract can neither rescind the transaction nor close it.
So, do my house and your money stay in escrow forever?
And, again, this is a very simple transaction. I could name others that are dozens of times more complicated.
I would rather junk the, I would say unrealistic, idea of a smart contract and throw all the disputes into the hands of a very, very, very smart AI judge and let it decide the whole controversy in a second or two. That’s actually a much more practical solution, at least maybe ten years from now.
— David Grace