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Renaissance of Smart Contracts - Blockchain
Blockchain is considered a part of this journey. The term blockchain constitutes three concepts, blockchain technology, blockchain software, and blockchain platform. It is defined as “a data structure that makes it possible to create a digital ledger of transactions and share it among a distributed network of computers.” [1] It uses cryptography to allow each participant on the network to manipulate the ledger securely without the need for a central authority. Without a central authority, it provides security by using cryptography, which prevents altering the data to the maximum level possible. Therefore, it is considered as having a significant potential to ease and secure public and private business transactions and reduce costs.
In terms of legal processes, the technical concepts and terms of blockchain must be well understood since blockchain constitutes the origin and platform of smart contracts. Simply, blockchain can be defined as a distributed ledger, including a chain of transactions that is continuously adding another block of transactions and is recorded on multiple networks and computers [2]. Blockchain has two main concerns: admissibility and the “code is law” principle. The first is generated by the lack of necessary regulation and jurisprudence in different jurisdictions. As smart contracts do not have a unified definition or are considered legally binding in all jurisdictions, their admissibility is still being questioned. The second gives the impression of eliminating, in a way, the rule of law and introducing a technological alternative. The “Code is law” principle uses technology to enforce rules, which creates an automated world, dictated by codes.
Authors: Av. Özlem Bulut Penezoğlu Founding Partner Av. Mine Çınar Associate
[1] Steven Norton – “CIO Explainer: What is Blockchain?” - Wall Street Journal, February 2016 [2] Dr. Pınar Çağlayan Aksoy – Akıllı Sözleşmelerin Kuruluşu ve Geçerlilik Şartları - 2021 [3] Dr. Pınar Çağlayan Aksoy – Akıllı Sözleşmelerin Kuruluşu ve Geçerlilik Şartları - 2021 [4] Federal Council of Switzerland – “Legal Framework for Distributed Ledger Technology and Blockchain in Switzerland”, December 2018 [5] Alex Lipton, Stuart Levi, Skadden – “An Introduction to Smart Contracts and Their Potential and Inherent Limitations” – May 2018 [6] ISDA and Linklaters – “Smart Contracts and Distributed Ledger – A legal Perspective”, August 2017
The use of technology from the beginning of contractual relation
The first step of entering the technology bubble was determining digital content as the subject of a contract, which happened a long time ago. It is frequently used for searching for a potential counterparty, buyer, or user of an asset/service, like in the case of Uber. At this point, the main issue is the legal characteristics of smart contracts. Can a smart contract be considered an agreement within the frame of the Law of Obligations or should it be considered a tool to enter an agreement or its execution? Nick Szabo, a computer scientist and a cryptographer, introduced the “smart contract” concept. Accordingly, smart contracts enable parties to draw up the contact in code language. In other words, smart contracts are digital codes that provide an automated or self-executing program. In terms of smart contracts, we can list the below characteristics:- Secured transactions - There are keys available either publicly or privately that identifies each user.
- Unchangeable nature - Once registered, the contract cannot be changed by anybody unless a deactivating feature is included in the algorithm.
- Self-execution - When conditions are met nothing can prevent the execution. This automation reduces cost. Although execution is guaranteed, the authority of the courts cannot be eliminated.
- Transparency - Even if the parties and the details of the contract cannot be accessed by others, everyone on the blockchain can know the existence of data.
Authors: Av. Özlem Bulut Penezoğlu Founding Partner Av. Mine Çınar Associate
[1] Steven Norton – “CIO Explainer: What is Blockchain?” - Wall Street Journal, February 2016 [2] Dr. Pınar Çağlayan Aksoy – Akıllı Sözleşmelerin Kuruluşu ve Geçerlilik Şartları - 2021 [3] Dr. Pınar Çağlayan Aksoy – Akıllı Sözleşmelerin Kuruluşu ve Geçerlilik Şartları - 2021 [4] Federal Council of Switzerland – “Legal Framework for Distributed Ledger Technology and Blockchain in Switzerland”, December 2018 [5] Alex Lipton, Stuart Levi, Skadden – “An Introduction to Smart Contracts and Their Potential and Inherent Limitations” – May 2018 [6] ISDA and Linklaters – “Smart Contracts and Distributed Ledger – A legal Perspective”, August 2017