An Ontology of Defects for Ethereum and its Smart Contracts

Since Friedrich Kessler wrote “Contracts of Adhesion-Some Thoughts About Freedom of Contract” in 1943, condemning narrow adherence to the principle of “freedom to contract” in the face of large scale enterprises’ growing preference for standard form contracts, Courts have balanced their desire to uphold contracts while protecting weaker parties from adhesion. Today, they face similar challenges with the rise of code-driven smart contracts and blockchain governance. Similar to Kessler’s world, where standard-form contracts were a tool for “excluding or controlling the ‘irrational factor’ in litigation” such as uncertain outcomes of judicial interpretation, automated smart contracts aim to put themselves outside the control of both contractual parties and the courts, thus removing any ability to breach or tamper with the original terms. Smart contract advocates contend that removing the judiciary as the governing body over contract law and imposing contractual performance via decentralized blockchain governance improves efficiency and certainty.
 But, how much can one really write a contract that completely circumvents the potential for legal intervention or judicial enforcement? Will smart contracts finally achieve the complete separation between private and public law that advocates of “freedom to contract” originally claimed, or does the common law legal system’s deep-rooted belief in the rule of law and due process prevent the judiciary from being excluded from contract enforcement regardless the medium? And is there a risk that, as smart contract sceptics posit, smart contract platforms and blockchain governance create a new feudal order with a “potentially illegitimate exercise of power” and “normatively suspect” wealth distributions?
 The short answer, as this paper will demonstrate, is that as long as smart contracts meet the traditional requirements of a contract, they cannot fall outside the establish legal system’s purview. The only thing a smart contract truly adds to traditional contracts is automated execution that is enforced by the blockchain’s consensus mechanism; this may provide some efficiency to the legal system by streamlining basic performance but it cannot be the only form of governance over smart contracts. While there may be procedural challenges to undoing or enforcing specific performance under smart contracts because of their decentralized features, any substantive problems that could occur within a smart contract are imminently addressable with and must be subjected to the principles and remedies found in traditional contract law. Finally, I will conclude with current developments in smart contracts which point to a potential for them to become an integral part of our legal system going forward. Overall, I will argue that smart contracts, if carefully drafted to consider potential pitfalls and the future needs of contracting parties to amend or enforce, can hold the potential to provide efficiencies and greater legal certainty to contracting parties. This is achieved, not through circumventing the legal system, but by working with it to automate simple performance enforcement and deferring more complex contractual breakdowns to the judiciary.

Smart contracts are widely employed in many industries as a result of the high-quality development of science and economic technology, as well as the introduction of blockchain, which can automatically conduct retrieval, verification, and payment tasks. Smart contracts as an emerging topic, particularly the study of smart legal contracts, must remain forward-looking, and the smart contract sector cannot wait for the legal status of smart contracts to be resolved before advancing. The relative lag of the law becomes unavoidable due to the unassembled and unpredictable character of the law and thus its legislation. In this paper, we explore the incorporation of smart contracts into the scope of legal regulation, the construction of a series of systems for smart contracts, and the prognosis of smart contracts in terms of contract logic, arbitration process, and formal verification from the current law. Furthermore, a smart contract payment template based on semantic-aware graph neural networks is proposed to address the traditional smart contract vulnerability detection payment template method's low detection accuracy and high false alarm rate, as well as the neural network-based method's insufficient mining of bytecode-level smart contract features. Experiments comparing the method described in this research to comparable methods reveal that the strategy proposed in this study improves all types of indicators significantly.

This study aims to determine the legal status of smart contracts from the perspective of Indonesian law and Islamic law through a comprehensive literature review. The revolution of the internet and smartphones has changed human life, as happens in smart contracts. This difference in character between smart and conventional contracts has not been fully anticipated by applicable law. That is why the urgency of fiqh renewal or reform of the law in the cyberspace era. Although smart contracts are still in their infancy, and there are still many critical issues that need to be resolved, the results of the literature research show that the smart contract has fulfilled the principles in the agreement/contract in Islamic law . According to the ITE Law, a smart contract can be interpreted as an agreement referred to in Article 1313 of the Civil Code, "an act where one person binds himself to one or more other people". Although this study is not sufficient, this needs to be elaborated from the perspective of Indonesian law. The most important things in smart contracts to comply with the Islamic law are: the sequence of processes in the smart contract must comply with Islamic law, the object being transacted must be halal, the perpetrators have complied with the provisions of the Islamic law, fixed price during the contract period and the number of parties involved in the contract may increase over time.

Smart contracts can solve many problems and make our lives more efficient. They have a potential to change the world as the World Wide Web did. Nevertheless, the focus of this working paper is a smart legal contract, a smart contract that is designed to create contractual rights and obligations. The smart legal contract should be recognized as a new legal concept as it does not fit in any existing concepts. The main question is whether it can be recognized and operate as a contract in a legal sense according to the U.S. contract law. The analysis shows that at least some smart contracts can. Additionally, this working paper underlines the importance of this technology to be within the framework of contract law. Finally, there are some thoughts on how the adjudication of disputes may happen.

This chapter outlines the genesis of, and background to, the volume as the first interdisciplinary exposition of the ‘smart legal contract’. In doing so, it provides an assessment of many of the critical issues that arise from the interface between law and technology as they pertain to computational contracts. Topics include notable developments in law and practice, the issues of ‘smart contract’ terminology and ostensible extra-legality, and the emerging techno-legal concept of the ‘smart legal contract’. Allen and Hunn proceed to frame the ‘smart legal contract’ as a ‘contract stack’ combining human-readable and machine-readable artefacts capable of being arranged to incorporate both the traditional recordation functions of written contracts with software-based operationalization of contractual obligations. The future development of terminology is suggested. The chapter concludes by introducing the author chapters and their contribution to the volume as a landmark in the literature on computational contracting.

In this note we describe a smart derivative contract with a fully deterministic termination to remove many of the inefficiencies in collateralized OTC transactions. The automatic termination procedure embedded in the smart contracts replaces the counterparty default by an option right of the counterparty. The application of smart contracts to cure issues in xVAs has been described before, see Morini et. al. (2015, 2017). However, a direct implementation of an OTC derivative as a smart contract may come with its own issues: * If the smart contract is implemented on a crypto-currency blockchain it will introduce a currency conversion risk. * If the smart contract has an automatic termination in case of insufficient wallet amounts, the contract essentially contains a bilateral American option. Both counterparts can willingly terminate the contract by emptying the wallet. This would render the contract useless. In this note we will fully describe the terms of a smart contract to replace a collateralized OTC transaction. We introduce a penalty payment to modify the American option right in the contract. The penalty and the excess amount in the wallet can be seen as a combination of default fund contribution and initial margin, inducing a per-contract termination probability. Hence, each contract come with its own termination probability (corresponding to the default probability). Based on this, ratings could be assigned on a per-contract basis. Such smart contracts are also interesting with respect to the mathematical theory of systemic risk, since each contract represents an individual counterparty, increasing the numbers of individual counterparties in the whole system and possibly justifying the application of mean filed theory (compared to a setup with a large central counterpart (CCP)).

This chapter makes a case against the use of smart contracts in the context of employment. It discusses the general operation of smart contracts, followed by a consideration of their potential use in employment. With that information as a lens through which to view the remainder of the chapter, four key suggestions are then made as to why smart contracts are not suited to instances of employment. The first is that smart contracts cannot account for an employer’s exercise of the managerial prerogative, which is inherent to employment. Secondly, smart contracts are unsuited to allowing for employers to exercise various types of discretions that tend to be contained under employment contracts, which, in turn, has the potential to unfairly prejudice employees. Thirdly, a smart employment contract is unable to allow an employer to performance manage, discipline and potentially dismiss employees for misconduct, or even to allow employees to respond to such circumstances—all of which are concepts of a strongly subjective nature. Finally, smart contracts are unable to accommodate for certain changes that are cognizant in instances of employment and inherent in the employee’s interests; they are inflexible and contain functional vulnerabilities that would generate unprecedented and unnecessary structural change in workplaces. Put simply, smart contracts are not up to the job of supplanting the existing means of generating a contractual relationship between an employer and employee.

Smart contracts on a blockchain network can be implemented to control digital value. A key question that arises is the extent to which smart contracts can, or should, operate as “smart legal contracts”. Simply put, can smart contracts meet requirements of validity at law and practical efficacy. In order to achieve the goal of value maximization, the efforts of policy-makers, standards organisations and regulators should be informed by first principles. Standards, and other regulatory activities, must be driven by consideration of the techno-legal functions of contracting. Blockchain-based smart contracts offer the potential to reduce transaction costs through new methods of stateful computation. When applied to commercial transactions, smart contracts can represent enforcement of an executed state. This paper argues that distributed ledger and smart contracts standards should seek to provide sufficient flexibility to facilitate contracting parties to coordinate in an optimal manner.

In recent years, advanced smart contract languages (ASCLs) have been proposed to solve the problem of difficult reading, comprehension, and collaboration when writing smart legal contracts among people in different fields. However, this kind of languages are still hard to put into practice due to the lack of an effective conversion method from the ASCLs to executable smart contract programs. Aiming at this problem, we take SPESC as example to explore how to design conversion rules from the contract in it to the target programming language in Solidity, and to propose a three-layer smart contract framework, including advanced smart-contract layer, general smart-contract layer, and executable machine-code layer. These rules provide an approach to convert the definition of SPESC contracting parties into party-contracts on target language, as well as to produce SPESC contract terms into main-contract on target language. Moreover, the proposed framework specifies not only program architecture and storage structure on general smart-contract layer, but also important mechanisms, including personnel management, timing control, exception handling, etc., which can assist programmers to write smart contract programs. Furthermore, taking four SPESC contracts as testing objects, we provide the whole process of converting from SPESC contracts to Solidity programs by the SPESC-Translator, and verify the efficiency and security of the conversion process, including coding, deploying, running, and testing through Ethereum. The instance results show that the conversion rules and the three-layer framework can simplify the writing of smart contracts, standardize the program structure, and help programmers to verify the correctness of the contract programs.

This book provides a landmark survey of computational contracting: one of the most important legal and practical trends for centuries. Computational contracts introduce software functionalities to operationalize, rather than merely record, acts of commercial coordination. In doing so, they bring together software and law in interesting and unchartered ways to create dynamic documents that present unique opportunities and challenges. Distributed ledger technologies have propelled ‘smart contracts’ into mainstream application over the last decade. The introduction of software into contractual relationships, however, may be implemented in a number of ways, of which such ‘smart contracts’ are only one. Broadly, it is possible both to express legal promises in code and to incorporate code-based elements within conventional (‘paper’) contracts. This volume examines the observed approaches and reflects critically on their relationship and the common issues raised. The organizing principle behind the volume is that emerging design patterns and considerations are beginning to form around the instantiation of code in contractual agreements—the ‘smart legal contract’. With incisive analyses from legal scholars, computer scientists, judges, and legal practitioners across common law jurisdictions, this volume addresses many of the foundational questions raised by smart contracts in legal theory and practice and provides a critical point of orientation in an emerging but still disparate literature.

Smart contracts are a means of facilitating, verifying and enforcing digital agreements. Blockchain technology, which includes an inherent consensus mechanism and programming languages, enables the concept of smart contracts. However, smart contracts written in an existing language, such as Solidity, Vyper, and others, are difficult for domain stakeholders and programmers to understand in order to develop code efficiently and without error, owing to a conceptual gap between the contractual provisions and the respective code. Our study addresses the problem by creating smart legal contract markup language (SLCML), an XML-based smart-contract language with pattern and transformation rules that automatically convert XML code to the Solidity language. In particular, we develop an XML schema (SLCML schema) that is used to instantiate any type of business contract understandable to IT and non-IT practitioners and is processed by computers. To reduce the effort and risk associated with smart contract development, we advocate a pattern for converting SLCML contracts to Solidity smart contracts, a smart contractual oriented computer language. We exemplify and assess our SLCML and transformation approach by defining a dairy supply chain contract based on real-world data.

This paper proposes and explores a smart wholesale contract embedded with realtime market shift analysis as a potential solution to improve supply chains' responsiveness to volatile market conditions. We examine the operational and strategic value of smart contract to supply chains when they engage in a Cournot competition in a market where the customer demand can shift (for downstream retailers) and/or a production cost can shift (for upstream suppliers) over a planning horizon. We find that the value of smart contract is shaped by intra-supply-chain effect, spillover effect, and inter-supply-chain competitive effect of smart contract adoption by a supply chain. A comprehensive analysis of these effects reveals that supply chains' incentives to adopt smart contract depend on three key factors: a magnitude ratio that compares the magnitudes of the demand and cost shifts, a timing ratio that compares the timings of the demand and cost shifts, and a contract execution lag that measures the degree of contract automation. We find that a low magnitude ratio generally favors smart contract adoption. In the absence of competition, smart contract adoption is more likely when the demand shift is expected to occur earlier (later) than the cost shift and the execution lag is large (small). In the presence of competition, supply chains' incentives to adopt smart contract can diminish as the competition intensity grows; moreover, their incentives to reduce the execution lag enhance as the competition intensity grows if smart contract is indeed adopted.

In this era of increasing cyber dependency in business dealings there is huge potential in the adoption of Distributed Ledger Technologies (DLT) particularly in the context of smart contract in the commercial world. The phenomenon of smart contract operates independently without the cumbersome need to engage any intermediary and is capable of executing specific task.(Thake, 2018) People relates it more to a piece of code (known as a software agent) that is designed to execute certain tasks if pre-defined conditions are met. Such tasks are often embedded within, and performed on a distributed ledger.”(Stark, 2016) However, if one accepts the contention that smart contract is not merely as a set of computer code but a smart legal contract which contains obligations and legal terms that are enforceable, hence, in programming or writing smart contract, one must ensure that the software developers who design smart contract take note of the legal rules and principles behind the specific type of contract in question. It has been argued that there is too much dependency on the programming aspect in the creation of smart contracts by programmers and computer scientists. (Khalil et al., 2017)

This paper gives an overview on smart contracts and assess their legal relevance. The first part, explains the notion of smart contract and provides simple examples of it. In the second part, we propose a legal analysis of smart contract. First, we explore how smart contracts can be relevant in the eyes of the law. Then we differentiate and assess smart contract with regards to their types. And finally, we look at chosen problematic of smart legal contracts.

Introduction: the article is devoted to the analysis of legal regulation of smart contracts, the concept, content, and scope of their application. The author analyzes in detail foreign expe- rience of using smart contracts and suggests possible options for expanding the application area. The article also has a separate section that looks at smart contracts as compared with traditional institutions of civil law. Smart contracts are expected to find application in almost all areas of life in the future. As is often the case with new technologies, the use of smart con- tracts raises a number of civil law issues. Blockchain technology makes it possible not only to create new means of payment but also to autonomously manage almost any process. It can be used for individual contracts and even for the creation of autonomous decentralized systems. Purpose: to provide an insight into the institution of smart contracts and define their role in civ- il law. Methods: empirical methods of comparison, description, interpretation; theoretical me- thods of formal and dialectical logic; special scientific methods such as the legal-dogmatic me- thod, the methods of interpretation of legal norms and comparative legal research. Results: smart contracts are computer programs that perform legally significant actions according to predetermined algorithms set out in the form of a so-called program code. In practice, they are especially important in connection with the development of blockchain technology or (more generally) distributed ledger technology. Conclusions: the term ‘smart contract’ was defined by Nick Szabo in the 1990s as a sequence of commands represented in digital form, including transaction protocols that execute these agreements. Thus, smart contracts formulate rules and sanctions for agreements and execute them automatically. These are not necessarily contracts in the legal sense, but they are capable of controlling, tracking, and documenting legally signif- icant actions. Smart contracts can also be implemented using traditional, for example, mechan- ical technologies (e.g. in a vending machine). However, blockchain and distributed ledger tech- nologies make it possible to implement incomparably more complex rules and enforcement me- chanisms and offer a decentralized environment with an integrated settlement system. From a legal point of view, smart contracts perform two functions. On the one hand, they serve as a functional equivalent of a contract since their technological code can identify the services to be exchanged as well as the conditions under which they must be provided. Being the normative order of the digital, this code formulates the program of obligations of the parties. It resembles the legal order of a contract, without necessarily coinciding with it. On the other hand, smart contracts serve as a tool for the execution of contracts – by controlling, monitoring, and docu- menting the exchange of services. They can also facilitate the execution of conventional con- tracts by translating their provisions into a technical code, verifying the occurrence of agreed- upon events, and enforcing contracts. Smart contracts are suitable for contractual relation- ships, for example, for processing payments or delivering goods without the participation of the parties and an intermediate step in the form of direct execution. Smart contracts are gaining more and more popularity, especially in the financial sector. In addition to the so-called token economy (cryptocurrencies, ICO, etc.), there are also discussed algorithmic ETFs, online plat- forms for loans or project financing. Another important area of application is sharing economy. From a legal point of view, smart contracts can either be the subject of a contractual agreement or generate it on their own. There is sometimes put forward a thesis under the motto ‘Code is law’ that smart contracts give rise to a largely autonomous legal system and/ or are not subject to applicable law. However, this appears to be an erroneous conclusion