Why smart contracts can't be fully automated

Thor Olavsrud

Smart contracts

Blockchain technology has been generating excitement in the public and private sectors for the past several years for many reasons — a prominent one being support for self-executing contracts commonly referred to as smart contracts. But while smart contracts have the potential to streamline many business processes, full automation isn't likely anytime in the foreseeable future.

"Smart contracts are a combination of some certain binary actions that can be translated into code and some reference to plain language like we have today that is open to litigation if you mess up," says Antonis Papatsaras, CTO of enterprise content management company SpringCM, which specializes in contract workflow automation. "I think it's going to take forever."

 

The history of smart contracts started with vending machines

Computer scientist Nick Szabo proposed the phrase "smart contracts" in 1994, describing it as a "computerized transaction protocol that executes the terms of a contract." He further elucidated the idea in his 1997 paper, Formalizing and Securing Relationships on Public Networks: "The basic idea behind smart contracts is that many kinds of contractual clauses (such as collateral, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with, in such a way as to make breach of contract expensive (if desired, sometimes prohibitively so) for the breacher."

Szabo suggested that the humble vending machine should be considered a primitive ancestor of the smart contract. It takes in coins, in exchange for which it dispenses product and change according to the displayed price.

"The vending machine is a contract with bearer: anybody with coins can participate in an exchange with the vendor," he wrote. "The lockbox and other security mechanisms protect the stored coins and contents from attackers, sufficiently to allow profitable deployment of vending machines in a wide variety of areas."

The smart contract Szabo described would be a significant leap beyond that, capable of embedding "contracts in all sorts of property that is valuable and controlled by digital means."

 

Blockchain makes smart contracts smarter

In the years since, blockchain technology — a secure, distributed ledger that can ensure the integrity of digital transactions — has become a platform that makes smart contracts feasible (though not without hiccups).

Essentially, smart contracts are executable code that act only when specific conditions within the blockchain are met. This allows a blockchain to automate activity like payment transfers when a task is completed, or even a partial payment when a milestone is achieved.

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