Smart contracts face ‘imminent challenges’ as ‘code is law’ faces controversy

If a certain repetitive task can be replaced by self-executing blockchain code, that doesn’t mean that code should do so.

Yesterday, some Wall Street insiders and blockchain innovators gathered at New York Law School in Manhattan to discuss when smart contracts are good, when they are bad, and what is holding back the technology’s widespread adoption.

Ari Juels, a professor at Cornell University and co-director of the Cryptocurrencies and Contracts Initiative (IC3), said:

“There are some big and pressing challenges facing smart contracts right now.”

During a panel discussion about implementing legally sound and secure smart contracts at the event, hosted by the Wall Street Blockchain Alliance, Juels broke down the obstacles facing the technology into two broad categories:

First, the industry’s confidentiality has created a barrier : While financial institutions and other industry players praise the technology’s transparency benefits, they are hesitant to put their information on the blockchain.

In resolving this divergence of ideas, Juels saw two main directions in which the situation could develop.

First, he listed software solutions for running zero-knowledge proofs , such as the zk-SNARK technology used by Zcash, which allows the other party to a contract to control how much information they share and who can see it.

Second, he outlined a hardware solution . Specifically, Juels said Intel's Software Guard Extensions (SGE) would help strike a balance between confidentiality and transparency.

Intel’s Sawtooth Lake is based on a consensus algorithm called PoET (Proof of Elapsed Time) and is designed to run in a trusted execution environment (TEE), including Intel SGX.

“Tools like zero-knowledge proofs and SGX allow blockchain users to have the best of both worlds.”

Ensuring the accuracy of smart contracts

Second, another 'imminent challenge' facing smart contracts is accuracy .

Joshua Ashley Klayman, special counsel in Morrison & Foerster LLP’s finance and projects team, said the question can be phrased this way: “How can you ensure that the code matches what you had in mind in the contract?”

Juels believes that widespread use of bug bounties could help uncover inaccuracies in code, as well as so-called 'escape hatches' that prevent contracts from executing in certain circumstances. Klayman says the answer to the accuracy problem is simplicity.

Klayman, who is also a founding member of the firm’s blockchain and smart contracts team, said:

“Typically, we tend to say the simpler the transaction, the better, and the less discretion, the better.”

However, there is an underlying quality of smart contracts, which is what Juels calls the need for accuracy. Smart contracts must also be updatable and interpretable.

'Code is law' debated

One of the strengths of smart contracts is their incredible accuracy, but this is also their weakness, Juels said.

An extreme example of this is the so-called ‘code is law’ philosophy, where there is no natural language counterpart to blockchain smart contracts.

As the first large-scale use of smart contracts, The DAO could not repair its own code once it was launched, because changing the code would be equivalent to changing the terms agreed upon by existing users. As a result, when The DAO was attacked, funds slowly drained away, and its cryptocurrency community was helpless until a more drastic solution was implemented - a hard fork.

Preston Byrne, COO and general counsel at Monax Industries and a long-time critic of smart contracts, described the ‘code is law’ philosophy as ‘buzzy marketing’ nonsense uttered by ‘non-lawyers’.

Adjoint founder and CEO Havell Rodrigues explained that the next generation of smart contracts must be able to give at least a little bit of access to the community that uses the smart contracts.

Rodrigues said:

“You want to make sure that enterprise users, legal users can resolve issues with smart contracts.”

Bad Smart Contracts

This group of blockchain professionals also addressed the issue of what not to do and what not to create during the smart contract creation process.

Generally speaking, the value that smart contracts bring will only be proportional to how often they are used, so using a contract once and using a contract rarely are unlikely to be valuable use cases.

At the same time, the value of smart contracts is only as valuable as the intermediaries they disrupt, so counterparties that require no or minimal intermediaries are less likely to use smart contracts.

However, when smart contracts are created, they are not always done in accordance with the design principles.

When asked what kind of smart contract ideas are inappropriate, Juels said that smart contracts actually bring a lot of opportunities for criminal activity.

Standard Smart Contract

On the path to widespread adoption of smart contracts, there are more hurdles to overcome and resources to avoid.

In another presentation, Mike Meriton, founder of the Enterprise Data Management (EDM) Council, argued that smart contract standards currently under development will be the final step in their widespread adoption .

Last week, SWIFT unveiled its own proof-of-concept, using Byrne’s Eris software and the Tendermint consensus engine, designed to demonstrate how the ISO20022 standard could function on a blockchain.

Earlier this year, the Bankers Association for Finance and Trade (BAFT) expanded its own blockchain standards discussions with a major hire. Shortly after, the European branch of the International Securities Association’s Institutional Trade Communication (ISITC) proposed 10 blockchain benchmarks.

While previous blockchain standards work appears to have focused on blockchain interoperability, Meriton said that the EDM committee’s Financial Business Industry Ontology (FIBO) project has been aimed squarely at smart contracts in general.

The non-profit trade association, which has more than 200 members, is currently in an advanced proof-of-concept phase with the FIBO standard, which is based on the actual language of traditional contracts and is designed to handle the large processing requirements of frequently traded cross-platform contracts.

Meriton said:

“The whole point of scaling blockchain is to leverage standards like ISO and FIBO. There is huge potential.”

The EDM founder said he is currently in talks with Digital Asset Holdings, Consensys and R3, and was testing with Wells Fargo, State Street and Deutsche Bank earlier this year. He expects to create some proofs of concept based on the standard, which will be launched in late 2017.