You've probably heard the buzz about so-called 'smart contracts.' These contracts resemble computer code more than typical legal documents, relying on programing to create, facilitate, or execute contracts, with the contracts and conditions stored on a blockchain, or a distributed, relatively unhackable ledger. The technology is considered so promising that PC Magazine recently declared 2017 to be "The Year of Smart Contracts."
But some are questioning whether smart contracts, alone, really are the future. Kevin Gidney, the co-founder and CTO of Seal Software, recently argued that contracts must be intelligent, not smart. Intelligent as in "artificial intelligence," that is.
Second-Guessing Smart Contracts
Gidney raised several criticisms of smart contracts in a recent piece for Corporate Counsel. "The usefulness of the data or functions encoded, and how they get accurately encoded onto the smart contract, are often questioned," he writes. Questions about smart contracts have only increased after one major blockchain initiative was hacked, allowing cyber thieves to take off with $50 million of cryptocurrency.
There are also issues of security and scalability. In a public network, "every person the blockchain can see the transactions that occurred," Gidney writes. Additionally, public blockchain networks limit block sizes in order to prevent too great of processing demand when distributing the public ledger.
Are Intelligent Contracts the Right Alternative?
Gidney proposes intelligent contracts as the solution to smart contracts' failings. Intelligent contracts rely on an AI system that is "is taught to continually and consistently recognize and extract key information from contracts, with active learning based on users' responses, both positive and negative, to the extractions and predictions made," while still relying on the blockchain.
What's that look like in real life? Think of a large international company with a range of business units:
Let's say they have 15 different contracting solutions on both the buy and sell sides of their business, and in their legal teams, with no standard reporting on contracts. They continually sign master agreements in different locations or departments, and should allow all global entities access to discounts once negotiated levels are reached or exceeded. This is a very common challenge with larger organizations.
You can immediately see where a "smart contract" could be used to encode the master agreement's key performance indicators (KPIs) onto a blockchain, and then automatically apply the discounts across all departments.
A smart contract could accomplish that, but an intelligent contract can go further. "Why not," Gidney wonders, "share the same information between parties -- as a single entity with continually updated contract terms?"
What about the security and scalability issues? Intelligent contracts can slough off the restraints of the public blockchain network, Gidney writes. These contracts "use private blockchains with algorithms to ensure no single system controls the creation of the blocks, leading to immutable and distributed consensus." Limitations on block size are removed (or at least placed in to private hands) and enhanced security can be implemented.
Intelligent contracts could also have the benefit of being located in a single repository, allowing quick review and analysis. According to Gidney:
The current "deal room," where limited subsets of contract documents are placed for manual reviews across multiple legal professionals, will no longer be needed, significantly reducing time and cost. The deep analytics embedded in intelligent contracts will mean that M&A and legal professionals can immediately, and visually, capture all types of metrics and analytics across entire contract portfolios.
Of course, let's not get too ahead of ourselves just yet.
The blockchain remains more buzz than reality in many companies and lawyers lives. Smart contracts have yet to displace old-fashioned, pen and paper contracts. It may be a bit premature to call for intelligent contracts to replace smart ones.
But if intelligent is better than smart, it would be dumb not to explore it, right?