Smart contracts. It’s becoming more and more common to hear this term in conversations about cryptocurrencies and related topics, especially when it comes to business.
But what are smart contracts?
Perhaps, the simplest definition is that they’re contracts based on executable software code that is automatically fulfilled once the involved parties have complied with the terms in them and this contract lives on a blockchain.
For many, the first thing that comes to mind is something similar to traditional paper contracts, but this is different, so let’s take a look closer look at what smart contracts are and also discuss if smart contracts are halal.
What is the difference between traditional and smart contracts?
Both types of contracts are basically agreements in which two or more parties agree to comply with a series of conditions following a series of fundamental premises:
- The voluntary consent of all parties
- The contract’s object – goods or service
- A just, true, and legitimate cause
However, both types of contracts differ in three factors:
- The writing mode
- Their legal implication
- The mode of compliance
Traditional paper contracts are written in natural language; a lawyer writes the conditions and terms in human language – e.g., English, Spanish, etc. – and if all parties agree, they sign to secure their promise. This brings us to the next point: preparing these types of contracts has a cost. In this sense, it’s most likely that the parties involved will have to comply with certain requirements, as well as resort to a notary’s office; there is a legal implication.
On the other hand, these traditional contracts are subject to the party’s interpretation, which could favor one more than the other.
Unlike the former, smart contracts are computer programs. They’re written in computer language (software code) and are programmed like any other software to carry out one or more specific tasks according to the instructions given to them.
The above means that the fulfillment of the smart contract is not subject to the interpretation of any party: if event “A” occurs, then consequence “B” is automatically executed.
In this case, the legal involvement may fall into a gray area, as no trusted intermediary is required – such as a notary’s office – because that is done by the computer code, which will ensure that the conditions are met. This reduces time and costs significantly.
What are smart contracts used for?
Let’s now look at some of the most frequent applications for smart contracts.
Payment automation
A smart contract can be programmed to ensure that the indicated amount of money will reach the indicated person, people, or organizations at the required time. Some practical examples of this would be the automation of inheritance distribution, loan repayment guarantees, or automatic distribution of funds for humanitarian aid.
Registration and change of ownership
It’s possible to register in the blockchain the necessary documents to establish the ownership of some goods and later change the ownership using smart contracts. Some countries are already testing their own platforms for this, applying the technology to the real estate market.
Energy management
By creating a digital ecosystem for energy exchange, countries like Germany are connecting sources of electricity or fuel to smart contract systems both individually and at the business level, even customizing the consumption of each client. Also, companies related to the automotive industry are already using smart contracts to process the charging of electric cars.
Intellectual property
Smart contracts can help facilitate and automate the distribution of revenue in shared copyright cases. In some countries, they’re already testing smart contracts for managing copyright in several industries, like videogames and music.
Insurance
Smart contracts will allow the payment figures to be determined according to the type of policy automatically. This would help companies to get rid of excess paperwork and save valuable time in an industry that already spends millions each year processing and handling claims.
Automatic purchases
It’s possible to set up a smart contract to buy stocks, cryptocurrencies, or any other product at a specific price for a specified period of time.
Voting
The results of any voting, from the simplest poll to government elections, could also be recorded and verified with certainty and precision. An immediate consequence could also be established according to the results of those votes.
Smart property
Also, a smart contract can be related to any object controlled by digital means. In this way, the smart property can be associated with IoT (Internet of Things) objects, from devices such as a smart blender, to homes and cars, thus automating the rental and ownership of these assets.
Are smart contracts safe?
Smart contracts are apparently a great idea, but for all practical purposes, if you wanted to buy a house for example, what would the process look like?
How would the smart contract make sure that the seller of that house will give me the title to the property once I have paid what I agreed to? What guarantees do I have?
Also, handling large sums of money has strong regulations. Doesn’t this affect smart contracts in the same way?
And what if a hacker gets their hands on the software that makes the contract work?
Perhaps, one of the parties could try to manipulate the software or the computer where the contract was written or even the source code…
Fortunately, today there are two key technologies that allow smart contracts to work and be reliable: blockchain and the Internet of Things (IoT).
Well, only blockchain is capable of almost entirely solving the three problems that I already mentioned above:
- Connection between goods and software
- Computer manipulation
- Regulation for handling money
Blockchain is an encrypted, immutable, and decentralized database in which almost anything can be registered, including a smart contract, so computer manipulation is ruled out.
Also, blockchain has allowed the emergence of cryptocurrencies like Bitcoin, a digital and decentralized asset, available to everyone and without additional territorial regulations. This makes money transfer much easier.
And finally, the connection to real-world assets. Returning to the house example, it is at this point where the Internet of Things enters the scene.
Today, about 2/3 of the objects in homes are connected to the internet, and these are everyday objects: from a washing machine and a light bulb to a stove or a lock.
The above is summarized in that, being connected to the internet, these devices can be controlled remotely and automatically. The advantages of this are then translated into three words:
- Autonomy
- Security
- Trust
Thanks to smart contracts, human errors and the additional costs of resorting to a lawyer or a notary are eliminated. In addition, blockchain allows the information to be protected in an encrypted network so that it can be consulted from anywhere in the world, improving speed and transparency.
In this way, smart contracts can provide a certain degree of security, but since nothing in life is perfect, in the case of smart contracts there are still some obstacles to overcome.
Both IoT and blockchain are relatively new technologies and in the case of IoT, it still has a long way to go in terms of security. In fact, IoT devices are easily hackable, while blockchain is immutable, which would be inconvenient if it were necessary to change any conditions in a contract.
Smart contract experts can also make programming errors, which could make it easier for a third party to steal the funds stored in a contract – something that already happened with the DAO in 2016. The legal issue can also be a bit fuzzy in some cases, something that I’ll talk about shortly.
Are smart contracts legal?
The legality of a smart contract will depend on both the jurisdiction and the contract’s interpretation of the jurisdiction to which it should adhere.
By working on blockchain, these contracts can be consulted from anywhere in the world, which makes their legality fall into a gray area. The reality is that this aspect is still being discussed.
The reason for this is simple, smart contracts are not publicly available as a mass product or service. In fact, it’d be very easy to classify them as illegal. Nor can it be said that they’re illegal or that they have been banned since, at the moment, some governments are more focused on making cryptocurrencies illegal.
In any case, there are still many legal considerations to be resolved regarding smart contracts, but step by step, the world, and its laws are already opening up to them. In fact, in some states of the US, they’re already considered to have the same legal status as traditional contracts, and some analysts suggest that this methodology will be imposed in the industry within a few years thanks to the efficiency and cost savings that they provide.
Are smart contracts halal?
Are smart contracts halal? Generally speaking, yes, smart contracts are halal. As mentioned earlier, in the simplest of explanations, smart contracts are executable software code on a blockchain that is automatically fulfilled once the involved parties have complied with the terms in them and this is permissible in Islam.
Islam accepts the evolution of technology that allows contracts to move from traditional paper contracts to blockchain computerized contracts so long as the contract meets the requirements of the sharia with the rights of all parties being honored and fulfilled.
Are smart contracts the future?
Smart contracts are increasingly used due to the great advantages they provide in terms of security, precision, and cost savings. But they also pose a significant challenge for some sectors, especially for lawyers.
For starters, blockchain transactions are located everywhere and nowhere; in most cases, there is no central server that can be used as a reference to establish the location of this data. This raises a number of legal questions, specifically regarding:
- Determining the regulations to apply according to the smart contract location.
- Determining the location of the property transferred by the contract.
- The protection of privacy and data.
- Avoiding fraudulent activities such as money laundering, among others.
All this makes clear the need to enforce the entire set of rules governing self-executing smart contracts (Lex Cryptographia). Now, the advancement of technology is unstoppable, insha’Allah, and there are already platforms on the internet that are advertised as alternatives to certain laws and judicial systems.
Some experts claim that when the Lex Cryptographia becomes established and in common use, technologies such as smart contracts will eventually displace certain laws, judges, and even courts.
However, there are also those who believe that smart contracts have certain ideological implications since they can drag entire groups towards certain actions and behaviors. This can be expanded thanks to the use of artificial intelligence (AI).
The combination of these two technologies could bring a new regulatory system that helps regulate society more efficiently, reducing costs and establishing a more personalized and adaptable system of rules, but that could also become a kind of modern crowd control system. The latter, I would argue is not ideal.
We would also want to see how our scholars and Muslim leaders would incorporate the essence, truth, and nuance of the sharia into smart contracts. The sharia is not rigid. Islam is a living, breathing, and flexible way of life and this would also have to be reflected in smart contracts.
And as we already know, the economic aspect usually ends up prevailing, so the profitability of this model could be key to its permanence in the industry.
Smart contracts are a revolutionary and exciting technology due to the great number of possibilities it offers to improve the way we do business, as well as our lives in general, and even though it’s a technology that still needs improvement, the future of smart contracts most certainly looks promising.
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