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The trouble with Smart Contracts

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  • 6 min read
  • 03 Jul 2018

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The government of Tennessee now officially recognizes Smart Contracts. That’s great news if we speak in terms of the publicity blockchain will receive. By virtue of such events, the Blockchain technology and all that’s related to it are drawing closer to becoming a standard way of how things work.

However, the practice shows that the deeper you delve into the nuances of Blockchain, the more you understand that we are at the very beginning of quite a long and so far uncertain path. Before we investigate Smart Contracts on the back of a Tennessee law, let’s look at the concept in lay terms.

Traditional Contract vs Smart Contract


A traditional contract is simply a notarized piece of paper that details actions that are to be performed under certain conditions. It doesn’t control the actions fulfillment, but only assures it.

Smart Contract is just like a paper contract; it specifies the conditions. Along with that, since a smart contract is basically a program code, it can carry out actions (which is impossible when we deal with the paper one).

Most typically, smart contracts are executed in a decentralized environment, where:

  • Anyone can become a validator and verify the authenticity of correct smart contract execution and the state of the database. Distributed and independent validators supremely minimize the third-party reliance and give confidence concerning unchangeability of what is to be done. That’s why, before putting a smart contract into action you should accurately check it for bugs. Because you won’t be able to make changes once it’s launched.
  • All assets should be digitized. And all the data that may serve as a trigger for smart contract execution must be located within one database (system).

What are oracles?


There’s a popular myth that smart contracts in Ethereum can take external data from the web and use it in their environment (for example, smart contract transfers money to someone who won the bet on a football match results). You can not do that, because a smart contract only relies on the data that’s on the Ethereum blockchain. Still, there is a workaround. The database (Ethereum’s, in our case) can contain so-called oracles — ‘trusted’ parties that collect data from ‘exterior world’ and deliver it to smart contracts. For more precision, it is necessary to choose a wide range of independent oracles that provide smart contract with information. This way, you minimize the risk of their collusion.

Smart Contract itself is only a piece of code


For a better understanding, take a look at what Pavel Kravchenko — Founder of Distributed Lab has written about Smart Contracts on his Medium post: “A smart contract itself is a piece of code. The result of this code should be the agreement of all participants of the system regarding account balances (mutual settlements). From here indirectly it follows that a smart contract cannot manage money that hasn’t been digitized. Without a payment system that provides such opportunity (for example, Bitcoin, Ethereum or central bank currency), smart contracts are absolutely helpless!”

Smart Contracts under the Tennessee law


Storing data on the blockchain is now a legit thing to do in Tennessee. Here are some of the primary conditions stipulated by the law:

  • Records or contracts secured through the blockchain are acknowledged as electronic records.
  • Ownership rights of certain information stored on blockchain must be protected.
  • Smart Contract is considered as an event-driven computer program, that’s executed on an electronic, distributed, decentralized, shared, and replicated ledger that is used to automate transactions.
  • Electronic signatures and contracts secured through the blockchain technologies now have equal legal standing with traditional types of contracts and signatures.


It is worth noting that the definition of a smart contract is pretty clear and comprehensive here. But, unfortunately, it doesn’t let the matter rest and there are some questions that were not covered:

  • How can smart contracts and the traditional ones have equal legal standings if the functionality of a smart contract is much broader? Namely, it performs actions, while traditional contract only assures them.
  • How will asset digitization be carried out?
  • Do they provide any requirements for the Smart Contract source code or some normative audit that is to be performed in order to minimize bugs risk?
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The problem is not with smart contracts, but with creating the ecosystem around them.


Unfortunately, it is impossible to build uniform smart-contract-based relationships in our society simply because the regulator has officially recognized the technology. For example, you won’t be able to sell your apartment via Smart Contract functionality if there won’t be a regulatory base that considers:

  • The specified blockchain platform on which smart contract functionality is good enough to sustain a broad use.
  • The way assets are digitized. And it’s not only for digital money transactions that you will be using smart contracts. You can use smart contracts to store any valuable information, for example, proprietary rights on your apartment.
  • Who can be the authorized party/oracle that collects the exterior data and delivers it to the Smart Contract (Speaking of apartments, it is basically the notary, who should verify such parameters as ownership of the apartment, its state, even your existence, etc)


So, it’s true. A smart contract itself is a piece of code and objectively is not a problem at all. What is a problem, however, is preparing a sound basis for the successful implementation of Smart Contracts in our everyday life. Create and launch a mechanism that would allow the connection of two entirely different gear wheels:

  • smart contracts in its digital, decentralized and trustless environment
  • the real world, where we mostly deal with the top-down approach and have regulators, lawyers, courts, etc.


About the Expert, Dr. Pavel Kravchenko


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Dr. Pavel Kravchenko is the Founder of Distributed Lab, blogger, cryptographer and Ph.D. in Information Security. Pavel is working in blockchain industry since early 2014 (Stellar).

Pavel's expertise is mostly focused on cryptography, security & technological risks, tokenization.

About Distributed Lab


Distributed Lab is a blockchain expertise center, with a core mission to develop cutting-edge enterprise tokenization solutions, laying the groundwork for the coming “Financial Internet”.

Distributed Lab organizes dozens of events every year for the Crypto community – ranging from intensive small-format meetups and hackathons to large-scale international conferences which draw 1000+ attendees.