This post has been authored by Harshit Goyal, currently in his 3rd year at National Law School of India University, Bangalore. In a well-reasoned piece, the author presents a simplified analysis of the feasibility of smart contracts.
Smart contracts are a set of self-propelled contracts which use blockchain as a platform to complete the transactions. This concept was introduced by Nick Szabo back in 1996. Since then, a lot of nations have endorsed this concept for being a technological revolution. In this post, I will endeavour to show that smart contracts are not really a smart option as they are riddled with several unsolvable legal issues. The analysis is primarily focussed on the smart contracts made on ethereum blockchain.
Regulating the Gas Prices
Smart contracts are made on a platform called Solidity. To execute a contract, you need to pay transaction fees to a miner so that he can mine a block for your contract. The technical jargon for this transaction fees is Gas, which is bought by paying a digital currency called Ether.
This can be understood with the help of an analogy. Imagine you are in the food court of any mall which requires you to purchase a food court card. You go to the counter and pay a certain amount, which gets credited to your food court card. This amount can then be used to purchase a big cheesy burger for instance. In the smart contract universe, the counter is the blockchain, the amount paid is the Ether coins, the credit in the card is the Gas, the burger shop is the miner and the big cheesy burger is the execution of your smart contract.
Now imagine that the burger shop owner is slightly eccentric. Apart from the type of the burger, he varies his prices depending upon the number of customers his shop has. Also imagine that he is a greedy man, who first serves those who are willing to pay more. This is the case with the miner and the gas prices. The prices of Gas depend on the market and can fluctuate greatly. There have been multiple instances of increase in gas prices due to an increase in the number of users. The gas price also depends on the nature of your contract and the kind of computer programming you choose. Also, like the greedy burger shop owner, the miners execute the contracts based on the gas fees paid. The more gas you pay, the more incentivised the miner is to execute your contract before any other contract.
Hence, if the users of smart contracts increase in the near future, the miners will increase their price in all probability. Since the very execution of smart contract depends on the miners, this will increase the overall cost of executing the smart contract considerably. As soon as this happens, smart contract technology will become inaccessible to a lot of Indians. Currently, there are only 5,00,000 users of smart contracts but still, the simplest of the smart contract is of worth $7000. With the increase in the number of users, this price will go up considerably and would remain affordable to less than 1% of Indians. Therefore, if this technology is allowed to become popular without regulating the gas prices, it is bound to be a catalyst for a plutocratic economy. But then, the important question is that can the gas prices be regulated?
Regulation of gas prices is next to impossible. The concept of smart contracts uses a decentralised technology in which the servers are distributed globally. Hence, no country can put a price ceiling on the gas single-handedly. For the sake of argument, even if a governmental agency manages to regulate the prices within its country, the user can always resort to offshore platforms to nullify the regulations. To counter this, having a uniform regulation at international level is highly unlikely since the developed countries would have all the incentive to keep the prices unregulated and give their citizens the priority in executing the contracts over the citizens of other counties. In a press conference last year, RBI did show apprehensions regarding non-uniformity in international regulations of cryptocurrencies and said that it can disturb the whole economic balance of the country.
This is further complicated by the fact that the identities in the smart contracts remain anonymous. Most of the blocks do not have the name or identity of the miner and this identity cannot be traced even by the cognoscenti of blockchain technology. Therefore, even if the international community builds consensus on the price ceiling of the gas, locating and punishing the offender is next to impossible.
Though the Supreme Court is still in the process to gauge the possibility of regulating cryptocurrencies, the aforementioned analysis shows that the regulation of at least gas prices is not possible. Hence it can be said that if smart contracts become popular in India, they are likely to increase the divide between rich and poor if nothing else.
Killing the Smart Contract
One of the myths regarding smart contracts is that they are completely self-executing and can be directed to execute the transactions in a particular time frame. Though the contracts work on ‘If-Then’ logic, a timer cannot be set in these contracts. This is the inherent fault of proof-of-work blockchain (on which the smart contracts are based) because the transactions can arrive on different nodes at different times. For executing a smart contract on time, one needs the help of external service providers called ‘Oracles’. But there always remains a problem of trusting the oracles as they can easily misbehave and procrastinate. Therefore, it is highly probable that there occurs a delay in the execution of a smart contract. This probability will further increase in the future if the users of smart contract increase at a rate faster than Oracles, so as to create more workload for them.
A pertinent legal question which can be raised now is regarding the contracts for which time is of the essence. This is a kind of contract which the parties agree to abide by before a stipulated time. As per the Indian Contract Act, if any of the parties fail to comply with the time requirements, the contract becomes voidable at the option of the other party.
Now let’s imagine that the parties enter into a smart contract of which time is the essence. But because of the oracle, the execution of the smart contract gets delayed. The only option which the aggrieved party now has is to externally give the command to kill this contract. But since there is a risk that the contract can execute itself anytime, the aggrieved party needs to exercise this command immediately after the stipulated time is over. On that account, the problem arises in cases where the end of this stipulated time is ambiguous and was not fixed explicitly by the parties beforehand. In such cases, there may be legal complications as to whether time was of essence or not and what was the specific point at which the contract was to be executed. Therefore, the party exercising this command in such a scenario is unduly burdened with the risk of giving the command unjustifiably and bear the brunt of repaying the huge losses to the other party.
The problem does not end here. Even after assuming this extra burden, the option of making the contract void is still jeopardised in this technology. One, even after giving this command, the contract can still execute itself and can make you pay Ether unreasonably. Second, there is no guarantee that even after giving this command your money will be returned to you. In a very famous fiasco, one user lost $300 million when he gave this command. Hence, it can be concluded reasonably that it will be a nightmare for the parties if they choose smart contracts for building a contract where time is the essence.
On the account of arguments made in this post, it can be said that smart contracts do not seem to be a feasible option. This is especially true for developing countries like India, where people can’t afford the exorbitant gas prices and where people are still not aware of legal intricacies involving the essence of time in a contract. There is, therefore, a need for a sustained, nuanced and interdisciplinary study of the concept of smart contracts before adopting it into the marketplace.
 The matter is listed as Siddharth Dalmia v. UOI (Civil WP No. 1071 of 2017) for which, the Supreme Court’s website shows August 2, 2019 as the next date of hearing. (Last checked July 25, 2019).