![[tesla.jpeg]] Photo by [Steve Jurvetson](https://www.flickr.com/photos/jurvetson/7408451314/) - [CC BY 2.0](https://creativecommons.org/licenses/by/2.0/) Smart Contracts work best in domains where contract terms: 1) can be expressed in straightforward "conditional logic," that can be automated, i.e. no "Party A will give Party B ***reasonable*** notice in the event it cannot perform" 2) can be based on objectively measurable, independently available data [[Insurance#Potential Applications]] This leaves us with two practical problems: 1. figuring out which aspects of a contract can and should be expressed as "conditional logic" 2. figuring out how to ensure we can get reliable, trustworthy objective data aka the [[Oracle Problem]] ## Smart Contracts Need Conditional Logic Stuart Levi and Alex Lipton of Skadden argue that Smart Contracts are best suited for two types of provisions: 1. ensuring the payment of funds upon certain triggering events, and 2. imposing financial penalties if certain objective conditions are not satisfied. [[Levi & Lipton 2018-05-26]] In each case, human intervention, including through a trusted escrow holder or even the judicial system, is not required once the smart contract has been deployed and is operational, thereby reducing the execution and enforcement costs of the contracting process. The Law Commission of England and Wales advises that Contractual obligations which follow a conditional logic (“if X, then Y”) are good candidates for being drafted in code, as conditional logic is inherent in computer programming. Generally these are the __**“operational clauses”,**__ of a contract, for example, party A agrees to pay party B a certain amount of money on the last day of the month until the contract is terminated [[The Law Commission 2021-11]](2.18) (see [[Will Smart Contracts Replace Traditional Legal Contracts?#Understanding the Pieces of a Contract]] ) ## Conditional Logic Examples of Contract terms that can be expressed as "if then" statements Industry | Contract | Example -----|------| ---- [[Insurance]]|[[Crop Insurance]] policy| If rainfall in County X is less than Y inches, Carrier agrees to pay policy holder $10,000 [[Derivatives]]|Oil Price Futures| A agrees to pay B if price of Oil exceeds X ## Smart Contracts Cannot Handle Subjective Terms Levi and Lipton argue that (1) nearly every contract contains some subjective terms, and (2) we are not going to be able to automate those terms any time soon (3) our ideas of what terms are "subective" and which can be automated will evolve >we are, at the very least, many years away from code being able to determine more subjective legal criteria, such as (1) whether a party satisfied a commercially reasonable efforts standard or (2) whether an indemnifications clause should be triggered and the indemnity paid. [[Levi & Lipton 2018-05-26]] Similarly, the Law Commission argued that provisions that require discretion, such as assesing "reasonableness" cannot be automated > Some contractual obligations may not be suitable for automation by a computer program because they are not based on conditional logic, and are therefore difficult to translate into code. These include obligations that require the exercise of discretion, reasonableness, best endeavours or some element of human judgement. [[The Law Commission 2021-11]](2.20) ## Challenges of Negotiating Smart Contracts As parties continue to negotiate smart contracts, they are going to run up against disputes about 1. whether a provision ***can*** be expressed in conditional logic, i.e. a forumlaic "if/then" and 2. whether a provision ***should*** be expressed in conditional logic are two separate and crucial questions. ### Whether provisions can be expressed in conditional logic It will take some time for those adopting smart contracts in a particular industry to determine which provisions are sufficiently objective to lend themselves to smart contract execution. And it is almost certain that negotiating parties will disagree on wether a provision can be capture in objective conditional logic. [[Levi & Lipton 2018-05-26]] ### Parties may value flexibility over conditional logic Parties negotiating contracts always engage in "cost-benefit" analysis, even if they don't call it that: is this worth fighting over? is it worth trying to think through every possible contingency? And of course the answer is that at some point you reach a point of diminishing returns. "We can't anticpiate every possibility, and we're just going to have to figure it out" ## Objectively Measurable Data From [[Lessons from "The Future of Chainlink" by Sergey Nazarov]] ![[Lessons from "The Future of Chainlink" by Sergey Nazarov#The Oracle Problem]]