In 1994 for the first time the cryptographer Szabo had the idea of being able to record contracts by computer code establishing that their activation was subject to the occurrence of certain conditions. This function took place and still happens through the if/then computer language typical of computer software and protocols. For example, when a given event (if) occurs, certain effects are produced (then), which are predetermined by the parties themselves, based on rigid instructions (for example, if there is a deadline, then payment is automatically made).

The technology of his time, however, was not compatible with his project and in fact to see the first smart contract in history operational we had to wait before 2009 with the advent of Blockchain technology and then 2015 when the founder of Ethereum made the first smart contract in history operational.

Only more recently have smart contracts become the focus of numerous debates, not only because they can find multiple applications but because they are strongly connected to the phenomenon of the “blockchain”, which is increasingly imposing itself on the international scene.

The main feature of this type of contract is that the operation can be carried out peer-to-peer, i.e. directly between two users, without the intermediation of a central control and verification entity, which for example establishes exchange rates. All this is made possible thanks to the use of “blockchain” technology (literally “chain of blocks”), thanks to which inputs and outputs deriving from the contract become blocks of encrypted language, stored on a public register (so-called ledger), which exploits the characteristics of a computer network of “nodes” (the various participating subjects), whose data are managed and updated in a unique and secure way and cannot be distorted, nor modified. It is the immutability of data in the blockchain that allows you to create a relationship of trust, in a totally disintermediated environment, between parties who, although not knowing each other at all, want to carry out transactions and financial operations. It is also the most critical node in the use of this type of contract, because as we will see later a system based on the immutability of data does not reconcile with the GDPR widespread in European countries.

In the smart contract included clauses and conditions that this is able to execute and enforce automatically when pre-established conditions occur. Transactions made through smart contracts, being based on cryptography and blockchain technology, are safer, more reliable, cheaper, faster and more transparent than traditional ones and everything is managed through computer keys. Having defined what a smart contract is in technical terms, let’s see what the types of protection are provided for the parties. In a system characterised by the immutability of the data provided, the main need was to understand if a smart contract could somehow be dissolved or if it was possible to provide forms of protection for the contractual parties.

The dissolution of the contract is possible thanks to the provision of the kill clause, currently present only in the most advanced blockchains such as Ethereum. With this clause, the self-destruction of the contract itself is regulated. In essence, we are going to discipline the elimination of smart contract software as it would happen for any software no longer useful or in cases where you want to make the performance of the blockchain more efficient. Another possibility is that the parties establish the suspension of the contract itself and the cases of reactivation.

In the event that only one party is in default, and, in the event that the service is not provided, the preparation of these clauses will allow the entitled party to resort to legal action to obtain the contractual termination or even the “elimination” of the contracted by the blockchain through the self-destruction function, it being understood that access to the system for any modification will be allowed only to the judicial authority.

As mentioned, this new type of contract has been the subject of judgmental and even political reflections in various countries such as the United States, where, in the State of Tennessee, Senate Bill no. 1662 of 26 March 2018, modifying the Tennesse Code, has inserted the definition of “Distributed Ledger Technology” and set a new regulation for the smart contract. Even in Europe we have dealt with smart contracts, but some countries are still in a phase of proposing a regulation while the European Parliament, in the “Resolution of the European Parliament of 3 October 2018 on distributed ledger technologies and create trust by disintermediating (2017/2772(RSP))” With regards to smart contract, it underlined:

• the need for the Commission to carry out a thorough assessment of potential and legal implications, such as jurisdiction-related risks

• the need to give certainty to the validity of an encrypted digital signature as a fundamental step to favour smart contracts

The field in which smart contracts have found greater application is certainly the one connected to the crypto world. Smart contracts can be concluded both off-chain and therefore outside the blockchain and both within the blockchain.

In the first case, the contract formalises all parts of the subsequent stages, containing the discipline of the agreements made and the provisions on their execution. In this case, the agreement is visible only to the parties who sign it and who establish the essential elements and conditions under which the contract will become operational.

When the contract is concluded in the blockchain, the contract will be public and visible to all participants in the network in which it was inserted and within which it was created, clauses and conditions will be communicated to all participants in the Blockchain and the contract will be impossible to modify or cancel A particularly controversial issue concerned the protection of data entered in the smart contract.

The regulatory solution was to set up the system according to the principles of co-ownership and reciprocity. According to these principles, each contracting party will be both the owner for itself and the other data. In reality, this would seem to be a valid solution that has put crisis in the GDPR system which, being oriented to the control of their data by the interested parties including the possibility of requesting its modification and cancellation, clashes with the Blockchain system in which instead the principle of immutability of the data provided and unlimited storage of the latter applies. In this regard, the question has been raised as to whether there is the possibility of integrating the architecture of the GDPR and smart contracts.

The main issue to be addressed from a GDPR perspective is that concerning the public key, that is, the code referring to a specific data or transaction of a certain user; can this code be considered as personal data? Although public keys do not allow the contractual parties to trace the user at the same time allow the provider to do so by tracing back to the contractual party via IP address, the latter setting would qualify such data as pseudonymised and therefore subject to the GDPR.

The future of smart contracts is far from written the provision of a type of contract that provides for its drafting in a single language (Solidity) implies that the use of this type of contract is reserved for connoisseurs of this language and the impossibility for the state to use different languages to get to the drafting of the same contract.

The Ethereum Foundation for the research and correction of errors related to smart contracts is more active than ever as the programmers who are trying to apply the Lity language to smart contracts. The real impact of smart contracts in Web 3.0 is yet to be seen.

For inquiries, you may contact:

Alessio Masala

Sabrina Pangrazio

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