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sujithjacob323Computer Law & Security Review 55 (2024) 106035
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Computer Law & Security Review: The International
Journal o Technology Law and Practice
journal homepage: www.elsevier.com/locate/clsr
From smart legal contracts to contracts on blockchain: An
empirical investigation
Fabio Bassan a,* , Maddalena Rabitti b
a
Proessor o International Law, Roma Tre University, Italy
b
Proessor o Economic Law, Roma Tre University, Italy
A R T I C L E I N F O A B S T R A C T
Keywords: The issue surrounding the nature and unction o smart contracts in the context o legal relationships has
Blockchain garnered signicant attention rom the European and national legislators, regulatory bodies and legal scholar-
Smart contracts ship. Sections I and II o this essay give an account o the results o the ongoing doctrinal debate, which is not
Smart legal contracts
univocal. The objective is to provide an assessment o both the advantages and limitations associated with smart
Contracts on chain
Regulation
legal contracts. In Section III, the authors introduce a novel negotiation process termed "contracts on chain". This
process enables parties to engage in negotiations, ormalize agreements and execute contracts directly on the
blockchain. Consequently, this negotiation approach serves as a potential bridge between the realms o Web 2
and Web 3. Further, it oers a user experience akin to online contracts but benets rom the inherent capabilities
o third-generation blockchains. Albeit on-chain contracts can be deployed on both private and public block-
chains, the authors express a preerence or their use on the public blockchain within a "logical platorm". This
choice allows to enhance regulatory compliance and mitigate the eects o decentralization on liability regimes,
while simultaneously optimizing the eciency gains o public blockchains. Notably, this approach ensures a
level o protection commensurate with that oered by private blockchains. The ultimate goal o this innovative
process is to streamline the ongoing technological transition and cultivate greater trust within the market or
emerging technologies.
Introduction urgent need or negotiated rules and tools to proactively address or
reduce potential risks that would otherwise pose unmanageable
The shit rom Web2, representative o the current digital platorm challenges.
paradigm, to Web3, characterized by distributed ledger technology Within the realm o blockchain technology, which serves as the
(DLT) and blockchain, represents a transormative transition. Similar to oundational inrastructure enabling the development o products and
any period o transition, this shit requires the implementation o value- services via smart contracts, divergent doctrinal perspectives come to
driven decisions to mitigate potential adverse consequences in the long the ore. These viewpoints requently maniest a pronounced ideological
run.1 character. Some scholars advocate a ully decentralized structuring o
Thus, it becomes clear that, despite the prevailing slogans extolling activities, which blockchain supports. By contrast, others rule out the
the virtues o absolute disintermediation and decentralization as ideal possibility o using smart contracts to manage (the legal) relationships
orms o governance,2 on one side, and a reluctance to regulate as driven between two or more parties. To date, the two positions seem hard to
by the ear o stifing digital innovation, on the other side, there is an reconcile: the rst aims to bridge the gap between current and uture
* Corresponding author.
E-mail address: [email protected] (F. Bassan).
1
For a brie illustration o the elements characterizing this transition, see: F. BASSAN, Web 3 in Transition, in CPI-Tech Chronicle, 2023.
2
See: A. WRIGHT - P. DE FILIPPI, Decentralized Blockchain Technology and the Rise o Lex Cryptographia, SSRN Electronic Journal, 2015, pp. 15-17; G. PAQUET - C. WILSON,
Governance ailure and the avatars o the antigovernment phenomena, CoG Working Paper, 2015, pp. 16-27. From a more dialectical perspective, see: M. ATZORI,
Blockchain Technology and Decentralized Governance: Is the State Still Necessary?, Journal o Governance and Regulation, Vol. 6, Issue 1, 2017, pp. 15 - 21 e 25 – 32; D.
YERMACK, Corporate governance and blockchains, Review o Finance, 2017, pp. 7.31; B. ARRUñADA - L. GARICANO, Blockchain: the birth o decentralized governance, Economics
Working Paper Series (WP n. 1608), Universitat Pompeu Fabra, 2018.
https://doi.org/10.1016/j.clsr.2024.106035
Available online 5 September 2024
0267-3649/© 2024 The Author(s). Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-
nc-nd/4.0/).
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
developments and move toward ull decentralization, while the second o international literature on this topic is already signicant. Thirdly,
rejects the need or a bridge given the limits o the blockchain envi- and as ar as technology is concerned, we have decided to operate on a
ronment. Among these, the most relevant is the risk that attempts to third-generation public blockchain,5 whose technical eatures allow or
navigate between – i.e. translate – programming code, machine lan- the use o new tools to build contracts-on-chain.
guage, and natural language are utile and will produce insurmountable In the realm o public blockchain, we conceptualize ’logical plat-
conusion. Accordingly, in the context o (legal) contracts written in orms’. These platorms, analogous to what currently exists in cloud
natural language, it is hard to promote the circulation o smart legal computing, regulate access and activities conducted on the platorm.6
contracts on a blockchain ecosystem absent ‘certied’ translations. This technological model increases the potential o public blockchains
We contend that both approaches risk shortcomings by overlooking while concurrently saeguarding the control typical o private block-
the potential value o a transitional link (a bridge) between the state o chains.7 This is a model that, within the current state o technological
the art and the uture development o blockchain. This bridge can advancement, better allows the development o Contracts-on-chain.8
eectively exploit blockchain eatures to enhance contractual certainty This model averts the shit towards decentralization without oversight,
and security, permitting the partial sel-execution o contracts and as it is with the Decentralized Autonomous Organization (DAO), because
providing ecient mechanisms or dispute resolution. In this article, we decentralization characterizes the underlying blockchain and not the
introduce a concept o a “bridge” that originates rom current online logical platorm operating atop it. Hence, our research has both theo-
contracts and that leverages the recent advancements in blockchain and retical and practical implications and marks a shit rom decentralized
smart contracts. nance (De-Fi) to distributed nance (Di-Fi), meaning a nance oper-
This evolution, evident in some contemporary blockchains (which ating on logical platorms coordinating each other (hence, distributed)
we will reer to as ’third-generation’ blockchain), transorms the and using decentralized blockchains. This entails the presence o various
blockchain landscape into a robust, open-source inrastructure, pur- logical platorms operating on one or more public blockchains inter-
poseully designed or adaptation and fexible enough to acilitate a connected according to a distributed model.
harmonious connection between the blockchain ecosystem and real- The need to ensure compliance with a minimum level o protection
world scenarios, an inrastructure that bridges the gap between the (necessary and sucient), i.e. to guarantee users o nancial services
language expressed in lines o code and natural language. This techno- and contracts on blockchain an equivalent level o protection to that
logical advancement holds signicant theoretical and practical signi- which they have in the real world, has also been recognized by Italian
cance as it combines the benets o digitalized negotiation processes on institutions. The Bank o Italy (National Central Bank) has initiated a
blockchain with the unctionalities o smart contracts. Via smart con- process to identiy guidelines or smart contracts in the nancial sector.
tracts, the parties to a contractual operation can engage in transparent There is a need to establish rules also in terms o contractual saeguards
negotiation and ecient execution. The idea is to create a new negoti- to ensure a complete balance between the interests at stake, innovation
ation process, which we dene as "contracts-on-chain". As an expression (including in the nancial eld), market trust, and user protection.
o the union between technology, legal expertise, and legal design, this This work ts into this context in order to outline a brand new
concept can support the ongoing transition while at the same time negotiation mechanism. The aim is to enable – on blockchain – the
acknowledging the aspiration o the European Union to oster innova-
tion with "reliable" smart contracts.3
At the outset, we bound the scope o the investigation in three di-
mensions. Firstly, we adopt a "European" perspective, one which oper-
ates under the regulatory ramework o the civil law system, as opposed
to the common law system. This perspective benets rom a path out- 5
We mean here Bitcoin as a rst-generation blockchain and Ethereum as a
lined by European institutions that, although not yet nalized, is clearly
second-generation inrastructure. Third-generation blockchains have innova-
dened in terms o its direction and objectives.4 Secondly, our analysis is
tive eatures that we describe in Sections 4 and 5.
conned to the nancial sector and Fintech applications, given that this 6
We explain this model at length in Section. 5.
is thus ar the most developed realm that is subject to considerable 7
DLT or private blockchains are characterized by a central authority that
attention rom European legislators and regulators. Moreover, the body controls all operations that take place within the network. Access to the
network is limited, in qualitative and/or quantitative terms, to the elements and
entities authorized by the central supervisory authority. In addition, access to
the transaction log and any other inormation is private. On a technical level,
decisions regarding access and operational limits are made by a certain number
o nodes, which may have specic rules or the use o the blockchain. Private
DLTs/blockchains thereore guarantee protection o personal data, which does
3
The notion o reliability in smart contracts is recurring in the regulatory not circulate on an inrastructure accessible to all, but which has limits in terms
ramework established by the European legislature. Specically, in Regulation o security, scalability, and interoperability. Public blockchains oer greater
(EU) 2022/858, which pertains to a pilot regime or market inrastructures guarantees (to varying degrees, depending on the characteristics o each) in
based on distributed ledger technology (DLT Pilot Regime), the legislature ac- terms o security, scalability, and decentralization and are transparent by
knowledges that practice reveals that ‘smart contract’ protocols have not yet design. Logical platorms on public blockchains thus maximize the advantages
been subject to any transparency, reliability, or security requirements (see o public inrastructures, while ensuring the protection o data and transactions
Recital no. 5). The Regulation emphasizes that eective inormation technology as in private blockchains (below, Section 7).
8
and cybersecurity measures related to the use o distributed ledger technology The contracts-on-chain model enhances the characteristics o some public
should guarantee, among other things, the reliability o all smart contracts blockchains, while increasing eciency and eectiveness exponentially when
employed within the DLT market inrastructure (Recital 41 and Art. 7(4)). embedded into a logical platorm with controlled access, as we will try to
4
According to some scholars, to maximize the potential o smart contracts demonstrate in the ollowing paragraphs. We have conceived and developed
and at the same time guarantee the minimum level o protection o the market contracts on chain since 2019 on a private blockchain (Hyperledger Fabric) to
and their users, the European Commission has adopted a so-called "law + test its potential and limits. In light o the need or straightorward oversight o
technology approach". See: T. SCHREPEL (European Commission), Smart Contracts personal data management, which arises rom centralized control, it became
and the Digital Single Market Through the Lens o a "Law + Technology" Approach, evident that private blockchains did not give adequate security assurances, and
2021. they ell short in terms o scalability and execution speed. Additionally, trans-
action costs were notably high. Consequently, in 2022, we embarked on the
development o contracts on chain on a public blockchain (specically,
Algorand).
2
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
pursuit o contractual objectives while adhering to the minimal pro- manner through the nodes o the network.9
tection requirements laid out by the European legislature concerning In computer development environments, the notion o a ‘smart
specic types o contracts. contract’ reers to a program that is instrumental to the automatic
From this standpoint, we have chosen to apply the contracts-on- execution on a blockchain o a specic unction that is desired and
chain model to well-established contractual rameworks, with a partic- created by the programmer.10 In this sense, smart contracts have unique
ular ocus on escrow contracts. These contractual arrangements, known characteristics as compared to any other sotware because (i) the pro-
or their conduct, inormation, and content obligations aimed to uphold gram is recorded on a blockchain and acquires the characteristics o
the equilibrium o negotiations, are requently standardized. We have immutability, security, and transparency ;11 (ii) the execution o the
selected these specic contractual models to acilitate a concrete com- program is deterministic and the result is stored on the blockchain; (iii)
parison between current smart legal contracts and contracts-on-chain the program can regulate the activities o the blockchain and thereore
that highlights the innovative potential o the latter while keeping a serve as a repository, and it can also transer digital assets (including
line o continuity with the ormer. virtual currencies, iv) the program runs on the blockchain and remains
In this article, we start rom the most signicant technological evo- immune to intererence with its operation, provided certain character-
lution, represented by the third-generation blockchain system, to illus- istics o the blockchain are met. It ollows that the smart contract as a
trate how the eatures o these blockchains, especially public blockchains, ‘code’ does not possess the necessary characteristics to qualiy it as a
streamline negotiation, contract conclusion, and execution processes
directly on the blockchain itsel, giving rise to what we name the "con-
tract-on-chain” model/mechanism. This concept appears to oer sub-
9
stantial advantages, particularly rom a legal perspective. E. MIK, Smart Contracts: Terminology, Technical Limitations and Real-World
In this mechanism, the smart legal contract unctions as a technical Complexity, (2017) 9 Law, Innovation and Technology 269, 280. The rst
tool that allows the negotiation, conclusion, and (partial) execution o denition was given by N. SZABO (Smart Contracts: Building Blocks or Digital
the contract, thereby reducing the risks o deault and potentially Markets, 1996, 16 Extropy): a smart contract “is a set o promises, specied in
digital orm, including protocols within which the parties perorm on these
resolving disputes. Moreover, it inherently links contracts and operates
promises”. M. RASKIN (Law and Legality o Smart Contracts (2017) 1 Georgia Law
automatically.
Technology Review 305, p.309), denes smart contracts as “an agreement
From this perspective, the use o smart legal contracts allows con- whose execution is automated” which is “eected through a computer running
tracts not only to be concluded on the blockchain but also to live and code that has translated legal prose not an executable program”. According to
thrive within it, incorporating additional attributes as compared to K. WERBACH- N. CORNELL, Contracts Ex Machina (2017) 67 Duke Law Journal 313,
traditionally concluded contracts. Lastly, we endeavor to elucidate the smart contracts can be generally dened as sel-executing digital transactions
transormative potential o this latest evolution, the issues it addresses, using decentralized cryptographic mechanisms or enorcement. An alternative
and the opportunities it presents. denition is given by T. GRAAF, From old to new: rom Internet to smart contracts
A nal, methodological premise should be made explicit. This paper and rom people to smart contracts, in Computer Law & Security Review, 2019
seeks to illustrate the potential o a tool (contracts-on-chain) within a (105322). According to the A. smart contracts are sotware programs: 1. that
are stored and executed without an intermediary in a decentralised manner on
specic technological and regulatory environment (public blockchain
various computers (nodes) which are connected on a peer-to-peer basis to each
and a logical platorm as a superstructure). We believe that this envi-
other in a network and owned by dierent people; 2. that execute ʻi this then
ronment provides the optimal context or comprehending the eects and
that ʼcommands autonomously so that contractual promises are automatically
nurturing the innovative aspects o this tool, all while maintaining executed; 3. in respect o which, as a condition precedent, a trans er o value (e.
consistency with the existing tools (smart legal contracts). However, we g. payment by the customer) can only take place i ultimately at least 51 % o
do not intend to assert that ’contracts-on-chain’ are universally suitable the nodes have reached consensus that the execution o the smart contract (e.g.
or all blockchain technologies or every sector. provision o the service by the supplier) has occurred in accordance with the
We thereore present contracts-on-chain as a ’bridge tool’ which requirements stipulated in such coded contract; and 4. the storing o which
utilizes blockchain, thus acquiring its characteristics o certainty and takes place in a public ledger which cannot be changed and which is oten
immutability in recording transactions, while simultaneously oering reerred to as a secure public ledger with a single source o truth.-. P. DE FILIPPI-
the user an experience similar to that proposed by current online con- A. WRIGHT (Blockchain and the Law: The Rule o Code, Harvard University Press
2018, p.74) dene smart contract as an “i-then”statement that runs on the
tracts. Furthermore, depending on the type o contract and the parties’
blockchain where “parties can enter into a binding commercial relationship,
intentions, all or parts o the unctions and activities within contracts-
either entirely or partially memorialized using code, and use sotware to
on-chain can pass through the blockchain. In this way, the rigidity manage contractual perormance.”
typical o blockchain contracts is adjusted according to the specic 10
The term ’smart contract code’ originally appeared in Ethereum docu-
needs o the particular case. Similarly, in contracts-on-chain, the tools mentation. Today, it is commonly employed in the blockchain community to
used or dispute resolution can be entirely or only partially on the describe any complex program that is stored and executed on a blockchain.
blockchain, again depending on the needs and intentions o the parties. While early blockchains were designed to perorm a limit set o simple opera-
For these reasons, we consider contracts-on-chain as a bridge between tions – primarily, transactions involving a currency-like token – recent tech-
Web2 and Web3 that, by allowing a modular use o the blockchain, can nological advancements have enabled blockchains to handle more complex
encourage its use or contracts. operations, dened in programming languages. On this subject, see also S.
NAKAMOTO, Bitcoin: A peer-to-peer electronic cash system (2008) URL: https://
bitcoin.org/bitcoin.pd; S. BISTARELLI, I. MERCANTI, F. SANTINI, An Analysis o Non-
Part I – Uncertain Denitional Boundaries
standard Transactions, Crypto Valley Conerence on Blockchain Technology
(CVCBT), Zug, Switzerland, 2018, pp. 93-96, doi: 10.1109/CVCBT.2018.00016
1. Smart contracts (codes) and smart legal contracts (2018)]); G. WOOD, Ethereum: A secure Decentralised Generalised Transaction
Ledger, EIP-150 REVISION (2014); C. ROBUSTELLA – C. E. PAPADIMITRIU, Recon-
Smart contracts structive ideas on the subject o smart contracts, between technological innovation
and legal rule P.A. Persona e amministrazione , 2022, p. 963 .
According to the prevailing opinion, a smart contract is a ‘computer 11
The smart contract code is saved on the ledger shared by all network par-
program’ that operates on a blockchain executed in a decentralized ticipants, so it can be easily consulted and veried.
3
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
(legal) contract.12 Those characteristics are unrelated to the primary From a contract law perspective, the automatic execution o the
purpose underlying the smart contract design, which is to identiy a code smart legal contract ensures compliance with the contract’s obligations:
that is stored and executed when specic conditions are met. This code the blockchain architecture does not allow or voluntary violations o
might encompass a single algorithm responsible or overseeing the data the established conditions.17 This reconstruction entails a shit in
fow o a company, validating account permissions, or handling ques- contractual practice rom an authoritative ex post judgment – typical o
tionnaire responses. In numerous instances, smart contracts do not traditional contracts – to an automated ex ante evaluation.18
possess an independent unctionality. Instead, they serve as essential A second doctrinal approach is more varied within itsel,19 ranging
components within a larger application executed on the blockchain, rom authors who congure the smart legal contract as a computer
thereby contributing to decentralization. program used to ormulate (in computer language), in whole or in part,
The term ‘smart contract’ lacks a universally accepted denition in the content o the contract, which is then executed automatically,20 to
academic discourse.13 The eorts made to dene the notion primarily commentators who believe it is a contract itsel.21 According to others,
revolve around a unctional dichotomy between ‘smart contract code’ the smart legal contract instead designates, in general terms, a structure
and a ‘smart legal contract’, as outlined in the research conducted in o the negotiating process rather than a conguration o interests.22
cooperation with the Bank o Italy.14 A signicant and authoritative part o the doctrine questions the
critical aspects o applying rules designed or traditional exchanges to
Smart legal contracts
According to an initial approach, a smart legal contract is a computer
program used solely to execute, in whole or in part, a contract entered
into in a traditional manner: it is a ’computerized transaction protocol’
that automatically executes orders (in this case, the terms o a con-
tract).15 According to this theory, thereore, "a smart legal contract is not 17
Shortcomings o smart contracts compared to traditional, court-enorced
a true contract but a sotware (or inormational protocol) developed to contracts are highlighted by the earliest legal doctrine: A. SAVELYEV, Contract
execute the contract".16 However, a smart legal contract is (sel-)su- Law 2.0: ‘Smart’ Contracts As the Beginning o the End o Classic Contract Law,
cient and is programmed to execute all and only the rules incorporated Inormation & Communications Technology Law (2017) 26, 116; K. WERBACH-N.
into the code. It makes only the terms and conditions o the contract – as CORNELL, Contracts Ex Machina (2017) 67 Duke Law Journal 313; M.RASKIN, (note
agreed upon by the parties, written in code orm, and saved in the 9); P. Cuccuru, Beyond Bitcoin: an early overview on smart contracts, International
blockchain with a timestamp – veriable, immutable, and irrevocable. Journal o Law and Inormation Technology, 2017;25:179; E. Mik, (note 9); M.
Giancaspro, Is a ‘Smart Contract’ Really a Smart Idea? Insights rom a Legal
When certain conditions o the agreement are met, the smart legal
Perspective (2017) 33 Computer Law & Security Review 825.
contract applies them (according to an "i-then" logic) and automatically 18
I. JERRY, – H. HSIAO, Smart Contract on the Blockchain – Paradigm Shit or
produces the intended eects (i.e., approves the exchange o a token Contract Law?, in US – China Contract Law Review, 2017, p. 686 ss.
between the parties). 19
Among others: P. CATCHLOVE, Smart Contracts: A New Era o Contract Use,
available on SSRN (3090226), p. 15; C. CLACK, et al., Smart contract templates:
oundations, design landscape and research directions, 2016, disponibile su:
http://arxiv.org/abs/1608.00771; M. DUROVIC -F. LECH, The Enorceability o
Smart Contracts, in Italian Law Journal, 2019, p. 504 ss; H. EENMAA-DIMITRIEVA - M.
SCHIMDT–KESSEN, Creating Markets in No-trust Environments: the Law and Economics
o Smart Contracts, in Computer Law &Security Review, pp. 69-88.
12 20
See: J. ROHR, Smart Contracts and Traditional Contract Law, or: The Law o the Carron e Botteron, How smart can a contract be? in Kraus, Daniel; Obrist,
Vending Machine, in 67 Clev. St. L. Rev. 71, 72 (2019), according to whom Thierry; Hari, Olivier (eds), Blockchains, Smart Contracts, Decentralised Auton-
“Smart contract is an unortunate name or something that is not necessarily omous Organisations and the Law (Edward Elgar Publishing, 2019) p. 101 ss.,
smart, or necessarily a contract”. A. GUADAMUZ, All watched over by machines o distinguishing between a smart contract and a smart legal contract based on the
loving grace: a critical look at smart contracs, Computer Law & Security Review, moment when parties make resort to a smart contract; a smart contract is
2019 10533, concludes that smart contracts are not contracts or all practical dened as being legal when it is used as a platorm or an agreement and when,
purposes. Ethereum co-ounder Vitalik Buterin himsel has stated that he re- at the launch o the program, the parties enter into a contractual relationship
grets using the overly legal term "smart contract" instead o a more technical with binding legal eects.The peculiarities o agreement execution, however,
and less captivating term like "persistent scripts”. raise complex legal issues. A. Wright - P. De Filippi, Decentralized Blockchain
13
The complexity o the matter extends to the extent that any attempt to Techology and The Rise o Lex Cryptographia, 2015, available on SSRN: https://
provide a denition is likely to ace criticism. See European Law Institute, ssrn.com/abstract=2580664, at pp. 24-25, admitting that “ambiguity and poor
Principles on Blockchain Technology, Smart Contract and Consumer Protection drating can [...] be used by parties to wrestle ree rom contractual conditions
(2022), p. 22; M. Durovic-A. Janssen, The Formation o Blockchain-Based Smart that parties no longer want to honor […] [Parties] can use a smart contract to
Contracts in the Light o Contract Law, (2018) 26 European Review o Private Law ensure that a contractual condition is executed, orcing the parties to remain
753. bound to their respective obligations.” Similarly: M. Durovic - F. Lech, The
14
See the Bank o Italy Occasional Paper n. 863, Characteristics o smart con- Enorceability o Smart Contracts, (note 19); M. Raskin, (note 9). Others, how-
tracts (M. DORIA, F. BASSAN, M. RABITTI, A. SCIARRONE ALIBRANDI, U. MALVAGNA), July ever, see the potential o smart contracts while recognizing the existence o
2024. challenges that need to be addressed; some are condent in the time needed or
15
For in-depth exploration o the topic, see: , P. CUCCURU, Beyond bitcoin: an the development and continuous application o this technology until best
early overview on smart contract, in International Journal o Law and Inormation practices are achieved. See, in this regard: E. Tjong Tjin Tai, Force Majeure and
Technology, vol. XXV (2017), 179 ss; K. KASPRZYK, The concept o smart contract Excuses in Smart Contracts, in European Review o Private Law 2018, pp. 787-904,
rom the legal perspective, in Review o Comparative Law Vol. XXXIV (2018), p. “smart contracts are not very well suited to deal with the nesses that are
101-118; M. RASKIN, The Law and Legality o Smart Contracts, in Geo. L. Tech. Rev. currently expected by non-lawyers and lawyers alike when it comes to excuses
305, 2017, p. 312. to perormance. […] Only by extensive development o best practices is
16
Rejecting a contractual nature: C. PONCIBò, The Digitalisation O Contracts In improvement to be expected”. Others, instead, limit the scope o application o
International Trade And Finance: Comparative Law Perspectives On Smart Con- smart contracts to certain sectors because their limited fexibility would not
tracts, in Digitalization and Firm Perormance, 131 (M. Ratajczak-Mrozek – P. allow widespread use: J. Sklaro, Smart Contracts and the Cost o Inexibility, in
Marszałek eds., 2021); O. MEYER, Stopping The Unstoppable - Termination and University o Pennsylvania Law Review, 2017, p. 287 ss.
21
Unwinding o Smart Contracts, in Journal o European Consumer and Market Law, See: M. MAUGERI, Smart contracts and contract law, Il Mulino, 2021.
22
17, 19, 2020; A. FERREIRA, Regulating smart contracts: Legal revolution or simply A. BENEDETTI, Contratto, algoritmi e diritto civile transnazionale: cinque ques-
evolution?, in Telecommunications Policy 2021, p. 45. tioni e due scenari, in Riv. dir. civ., 2021, p. 411 ss..
4
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
smart legal contracts. Thereore, or a smart legal contract to have or traditional enorcement mechanisms.28
relevant legal eects or the legal system and be binding on the parties,
its essential elements and the applicable discipline must be compatible 2. The lie cycle o smart legal contracts
with the civil law ramework that regulates traditional contracts.23
Hence, ‘smart contract code’ and ‘smart legal contracts’ do not In summary, the (technological) lie cycle o a smart legal contract
appear to ully overlap because they serve dierent unctions.24 Smart can be segmented into our phases.
legal contracts, in their essence, consist o lines o code that run on the The rst phase involves the translation rom natural language to
blockchain and represent an expansion o the smart contract into the programming language, which entails the creation o lines o code
legal realm. The smart legal contract is a genus that alls into the smart containing the instructions or the operation o smart contracts. This
contract species or, to employ the set theory, it is a smaller circle wholly process translates the contractual elements (whether essential or not)
contained within the larger circle that represents the smart contract, into programming language (Boolean logic). Once inscribed on the
specically applied to legal relationships. blockchain, the smart contract is immutable, unless a new version o the
Thus, smart legal contracts “constitute a combination o program- code is created.29
ming code and legal language”.25In legal discourse, the term smart legal This phase requires a combination o technical skills, encompassing
contract is oten understood as a tool operating on blockchain technology computer science (the programmer translates the content o the contract
that serves to articulate, veriy, and enorce agreements between parties into programming language) and legal expertise (a lawyer engaged in a
to a contract, either as a complement to or a substitute or traditional dialogue with the programmer so as to ensure an accurate translation o
contracts. Hence, the distinction between smart contracts (codes) and the unction’s content).
smart legal contracts has a unctional character.26 On a technical and The second phase consists o the transcription o the code onto the
technological level, however, the undamental mechanism remains blockchain. At this stage, the developer uploads the unctions that she/
uniorm or both categories. Blockchain technology ensures that, during he has congured, which the parties sign, oten with an asymmetric
the distributed execution o a smart contract, each node in the network double-key cryptographic system. The smart contract is then embedded
generates identical outputs based on a given set o inputs, without within a block (designated by a unique hash code) containing other
having to rely on data provided by trusted third parties.27 transactions and is added permanently and irrevocably to the block-
With this unctional perspective in mind, smart legal contracts chain. It is accompanied by a timestamp that explicitly indicates the date
enable the ulllment o mutually agreed-upon contractual conditions, and time o the transaction. Consequently, anyone can systematically
reduce the risk o deault, and curtail the need or trusted intermediaries track, consistently trace, and reely access the transaction.30 In the third
28
The most recent legal doctrine recognizes that smart contracts can reduce
transaction costs and increase eciency in contracting: Cuccuru (note 15);
Giancaspro (note 17). Vatiero partly disputes this assumption while also o-
ering solutions (M. VATIERO, Do smart contracts incur higher transaction costs than
traditional contracts? in Mathis K. and A. Tor (eds.), Law and Economics o the
Digital Transormation, Springer, 2023, pp. 21-32; M. VATIERO, Smart contracts vs
23 incomplete contracts: A transaction cost economics viewpoint, in Computer Law and
The issues most discussed in doctrinal debates concern: (i) the ormation
Security Review v. 46, 105710, (2022), p. 1-8). Others highlight the potential
and conclusion o the contract; (ii) the recognition o the parties to the agree-
beneties also rom data and consumer protection perspective: T. KIVIAT, Beyond
ment; (iii) the nullity o clauses; (iv) supervening events in ongoing relation-
Bitcoin: Issues in Regulating Blockchain Transactions (2015) 65 Duke Law Journal
ships; (v) the application o general principles o the legal system; (vi) the
569, 574; J. FAIRFIELD, Smart Contracts, Bitcoin Bots, and Consumer Protection
concept o substantive justice. For urther insight into this topic, see: European
(2014) 71 Washington and Lee Law Review Online 35.
Law Institute, Principles on Blockchain Technology, Smart Contracts and Consumer 29
Developers may decide to change approval conditions, x code issues
Protection, 2022; P. SIRENA - F. PATTI, Smart Contracts and Automation o Private
(bugs), or add new eatures. The upgrade procedure can be made arbitrarily
Relationships, in Bocconi Legal Studies Research Paper Series, 2020.
24 complex. For example, to update Ethereum smart contracts, developers can
The distinction is made clear by G. JACCARD, Smart Contracts and the Role o
perorm patterns, such as contract migration and proxy patterns. However,
Law (January 10, 2018), available in SSRN: https://ssrn.com/
these mechanisms vary depending on the underlying blockchain. In general,
abstract=3099885; L. Ante, Smart Contract on the Blockchain—A Bibliometric
this procedure requires the implementation o governance permissions to avoid
Analysis and Review, BRL Working Paper Series No. 10 (2020); B. CARRON, V.
unexpected manipulation by actors who are not authorized to change the
BOTTERON, How smart can a contract be?, in D. Kraus, T. Obrist, O. Hari (eds.),
execution logic. The immutability o a smart contract is oten understood as a
Blockchains, Smart Contract, Decentralised Autonomous Organisations and the
limit with respect to the fexibility o the contract. See, among many: J. FAIRFIELD
Law, Cheltenham, UK-Northampton, MA, USA (2019) p. 101 ., spec. pp. 111-
– N. SELVADURAI, Governing the Interace Between Natural and Formal Language in
114; G. RINALDI, Smart contract: mechanization o the contract in the blockchain
Smart Contracts, UCLA J.L. & Tech., 2022, p. 79 .; M. GIANCASPRO, Is a ’Smart
paradigm, in G. Alpa (ed.), Law and articial intelligence (2020), pp. 353-354.
25 Contract’ really a smart idea? Insights rom a legal perspective, Computer Law &
For a careul analysis o the combination o code and language, see the
Security Review, 2017, pp. 825 . As we will see, the contracts-on-chain so-
Bank o Italy Occasional Paper n. 863, Characteristics o smart contracts (M.
lution we propose overcomes this limit.
DORIA, F. BASSAN, M. RABITTI, A. SCIARRONE ALIBRANDI, U. MALVAGNA), July 2024. See 30
The use o blockchain also raises issues o coordination with the current
also: P. CUCCURU, Beyond bitcoin: an early overview on smart contracts, in Inter-
European legislation on data protection (GDPR). See: M. FINCK, Smart Contracts
national Journal o Law and Inormation Technology, vol. XXV (2017), 179 ss; K.
as a Form o Solely Automated Processing Under the GDPR, 2019, Max Planck
KASPRZYK, The concept o smart contracts rom the legal perspective, in Review o
Institute or Innovation & Competition Research Paper No. 19-01, available on
Comparative Law Vol. XXXIV (2018), p. 101-118; M. RASKIN, The Law and Legality
SSRN: https://ssrn.com/abstract=3311370 ; C. MILLARD, Blockchain and law:
o Smart Contracts, in Geo. L. Tech. Rev. 305, 2017, p. 312. For an experiment to
incompatible codes?, in Computer Law & Security Review, 2018, p. 843-846; G.
translate the buyer ʼs suspension right into code, see T. TJONG TJIN TAI, Formal-
VOSS, Data Protection Issues or Smart Contracts, in Smart Contracts: Technolog-
izing contract law or smart contracts, Tilburg Private Law Working Paper Series
ical, Business and Legal Perspectives (M. Corrales, M. Fenwick, S. Wrbka, eds.)
(2017-6).
26 2021;
See note 16.
27
H. DIMITRIEVA-M. SCHMIDT-KESSEN, (note 19), p. 69-88, discuss how smart
contracts “could provide a possible alternative mechanism or ensuring coop-
eration in transactions between two or more parties that cannot rely on any
common legal or social background guaranteeing contract enorcement”.
5
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
phase, when the predened conditions are satised,31 the smart contract llsu stpprovl_46
activates and executes the designated unctions by invoking yt 11 // "tt_s"
transactions. rm_ -1
In the ourth and nal phase, the smart contract is deactivated and pp_lol_put
ceases to produce on-chain or o-chain eects. Nevertheless, it remains yt 17 // "rls_onon"
stored within the blocks where it was initially embedded, unless its nt_1 // 1
editor has included a special ‘kill unction’ in the code and indicated the pp_lol_put
person authorized to activate this unction. rtsu
As previously mentioned, the smart legal contract is exclusively
composed o lines o code. For this reason, despite its ability to govern 3. Open issues
and/or automatically execute some aspects o the contractual relation-
ships, it aces signicant constraints. The most prominent o these lim- a) Four common issues
itations appears to be the reliance o the contracting parties on an There are our common issues o paramount importance when it
‘expert’ entrusted with the tasks o writing the code – understood as a comes to the compatibility o smart legal contracts within the rame-
programming language – and translating the contract drated in natural work o contract law: (i) the inaccessibility o computer language to
language into this code. those lacking the necessary IT expertise32; (ii) the need to establish the
To illustrate this process, we can consider an example o one degree o compatibility between the ontological rigidity o the code and
particular smart legal contract among the numerous possibilities: the the desired fexibility o the contract ;33 (iii) the applicability to smart
escrow contract. An escrow contract is an agreement between two contracts and to smart legal contracts o saeguards provided by tradi-
parties, the Depositor and the Beneciary, whereby assets such as money tional contract law; (iv) the applicability to smart contracts and to smart
or deeds specied in the contract are deposited with a third party, the legal contracts o traditional confict-o-laws rules.
Depositary, as collateral. These assets are subsequently released upon These issues are inherently objective, as exemplied by the specic
the ulllment o conditions established by the parties. case o an escrow contract. The rst issue involves identiying meth-
The technical transormation o the contract in the orm o a smart odologies to transorm natural language, as is prevalent in a ‘traditional’
legal contract unolds in two phases. The negotiation and signing o the contract and regulatory provisions, into inputs having a binary struc-
contract occur o-chain, adhering to the conventions o traditional ture. Simultaneously, it is essential to guarantee accessibility to this
contracts. Following this, the parties appoint expert individuals, known binary language so that the congruence o the contractual contents with
as developers, to place the contract on the blockchain and benet rom the smart contract can be ascertained.34
the advantages o sel-execution. Developers are tasked with translating
the contract rom natural/legal language into a programming language, (i) The inaccessibility o computer language
which enables the blockchain to automatically acilitate the execution o
the contract within the parameters agreed by the parties. In essence,
within the logical ramework o the smart legal contract, every operation 32
See J. ALLEN, Wrapped and Stacked/ ‘Smart Contracts’ and the Interaction o
that the contracting parties can perorm o-chain is converted into a Natural and Formal Language, ERCL, 2018, pp. 307-325; J. FAIRFIELD – N. SELVA-
specic unction comprised o a series o lines o code (the so-called DURAI, Governing the Interace Between Natural and Formal Language in Smart
instructions) that are visible on the (public) blockchain as an outcome Contracts, UCLA J.L. & Tech., 2022, at 79.
33
o the entire smart legal contract development process. J. SKLAROFF, (note 20). The author observes that the lack o fexibility in
By way o example, we present a segment o the escrow contract and, smart contracts presents a major challenge to the technology’s scalability. In
summary, and on a critical note, the author notes that a large-scale revolution
more specically, its unction concerning the proposal or the release o
in smart contracting would introduce much higher costs than those it seeks to
unds to the Beneciary as it appears on the blockchain.
eliminate, regardless o whether they are let to the negotiating parties alone or
// propos_rls shared among other stakeholders or the public in general. Scholarship has also
proposrls_14: raised a question regarding transaction costs, which are indeed relevant in rst-
Tror, 1 0 generation (Bitcoin) and second-generation (Ethereum) blockchains. On this
llsu sttsvlsrow_40 point, reerence is made to the writings o M. Vatiero (note 28). We will see
// Wvr pro must xpr n tr s no onon later (below, section 5, ii) how third-generation blockchains overcome this
rls or sput (WRONG_STATE) issue: it is precisely one o those cases where the technology enables the reso-
Assrt lution o a problem (transaction costs) that would otherwise hinder blockchain
txn Snr development. However, the issue o transaction costs attributable to a lack o
llsu spy_41 legal adaptation, as well as to poor adaptation, remains open. Nevertheless, we
will see how contracts-on-chain signicantly reduces them compared to the use
// Cllr must t Py (WRONG_SENDER)
o smart legal contracts.
Assrt 34
B. CARRON - V. BOTTERON, How Smart Can a Contract Be?, pp. 115-116. The
nt_2 // 64 authors, regarding the issues raised by the integration o a traditional contract
nt_2 // 64 into a blockchain, argue that the question o interpretation and the translation
== o contractual plain language into computer code is dicult or at least three
// Wron Att s lnt (xpt: 64 yts) reasons. First, contractual language is very technical and cannot easily be
(WRONG_DOC_HASH_LENGTH) replaced by commands o imperative programming (i.e., I/Then), especially
Assrt when it contains indeterminate legal notions, such as termination or ‘good
txn Snr cause’, obligations o ‘good aith’, or a ‘reasonable’ period. Second, even i the
contractual text could be translated into commands o imperative program-
ming, the text does not represent the only element o legal interpretation. Third,
without an automatic tool that allows or the transcription rom computer code
31
The conditions or execution can dier: They can be on-chain, where acts into plain language, using a smart contract or the conclusion o legal agree-
can be perceived directly by the blockchain itsel, such as the crediting o an ments would be signicantly less interesting. Without such a tool, a manual and
amount in digital currency to a wallet connected to the smart contract. They costly transcription would be required each time a diculty arises in the per-
can be o-chain, where they consist o events external to the blockchain that ormance o the contract. For the time being, programmers o translating ma-
occur in the real world, and which can migrate and have eects on the smart chines may ail to appreciate the importance o every word contained in legal
contract thanks to the oracles (on oracles, see below, Section 14). contracts, which may lead to disputes relating to interpretation.
6
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
The primary critical challenges concern the conversion rom natural in the developer who is responsible or the natural language’s trans-
language into two machine-understandable languages: the program- lation into code.41
ming language (expressed through words, numbers, punctuation marks, To clariy, i a contract intended or execution in Chinese is drated
and other graphical symbols) and the machine language (comprised o bilingually in English and Chinese, and one party understands English
bits conventionally represented as the numbers 0 and 135); these are but not Chinese, the enorceability o the contract depends on the ex-
respectively classied as high-level and low-level languages.36 istence o a certied translation. Similarly, when a natural language
The programming language is devised to process instructions to be contract is converted into machine language, the question arises
translated into machine language, which, in turn, conveys the in- regarding the party responsible or certiying the accuracy o the
structions to the computers or execution.37 An issue o adaptability translation. This predicament, which remains unresolved thus ar, casts
arises in this context, stemming rom the transposition o contractual doubt on the validity o the contributions made by legal scholars to date.
semantics into an algorithmic key. Human language is essentially con- The risks associated with language and the risk o disregarding a
verted into programming code, which replaces the normal comprehen- legal system whose application could theoretically by called or by the
sibility, fexibility, and versatility o natural language with binary smart contract are substantial. Many believe that this tool is unsuitable
dialectical rigidity represented by 0 and 1.38 because it could end up concentrating power exclusively in the hands o
The ‘translation’ rom natural language also introduces an issue o those who determine and write the rules o the code. This risk is inherent
the parties’ awareness to a smart legal contract. This issue holds in the Code is Law ormula,42 which has now also given rise to several
particular concern in certain sectors. For example, in the banking and corollaries, the most relevant being the ’rule o code’, which either
nancial sectors, transparency requirements play a pivotal role in entirely or partially supplants the ’rule o law’.43 In sum, according to
assessing both the correctness o the intermediary’s conduct and the the ’Code is Law’ principle, the code o each blockchain is the unda-
intelligibility/comprehensibility o the agreement in terms o its content mental norm dictating the legitimacy o smart contracts that can operate
and eects.39 only subject to the correct execution o the code. This approach carries
The matter o translating natural language into machine language several signicant consequences. Two o them are arguably most
via programming language in the context o contracts remains an un- notable. First, it transorms the smart contract into the norm, the code
resolved issue in scholarly debates.40 into the undamental norm, and the blockchain into the legal order.44
Regardless o the fexibility guaranteed by one programming lan- Second, according to some legal scholars, it leads to the extreme
guage compared to another (i.e. Phyton, JavaScript), the undamental consequence o replacing the principle o equality beore the law (the
issue remains the signicant trust that the contracting party must place rule o law) with the principle o neutrality concerning the code (the rule
o code).
35 (ii) The relationship between the ontological rigidity o code and the
The program written in programming language is called ’source code’,
while the one written in machine language and executed by the computer is the desired fexibility o the contract
’machine code’ (or also ’object code’).
36
Smart contracts are written in a high-level programming language, e.g.
Solidity or the Ethereum blockchain (see Solidity: Ethereum Smart Contracts
Programming Language, https://soliditylang.org/), or a scripting language, e.g.
41
Bitcoin Scripting (see: S. NAKAMOTO, Bitcoin: A peer-to-peer electronic cash system, A solution to this problem, which is also interesting because it uses tech-
and S. BISTARELLI - I. MERCANTI - F. SANTINI, An Analysis o Non-standard Trans- nology as a regulatory tool, thus applying “participatory regulation” (note 58),
actions, Frontiers in Blockchain, 2019, pp. 93-96), and are compiled into a set o is the certication o translation, described in detail by: J. KRIJNEN-M. CHAKRA-
bytecode instructions. The compiled bytecode o a smart contract is installed VARTY-G. KELLER-W. SWIERSTRA, Translation certifcation or smart contracts, in
within an execution environment. There are several execution environments Computer Law & Security Review, 2023.
42
that generally all into two categories: (i) memory stack-based interpreters (e.g., L. LESSIG, Code version 2.0, Basic Books, 2006; L. LESSIG, Law Regulating Code
Bitcoin Script interpreter) (ii) virtual machine-based interpreters (e.g., Ether- Regulating Law, in Loyola University Chicago Law Journal 2003, pp. 8 ss.; L. LESSIG,
eum Virtual Machine). See: V. BUTERIN, A Next Generation Smart Contract & Code is law, Harvard Magazine, 1.1.2000.
43
Decentralized Application Platorm; N. KANNENGIEßER, S. LINS, C. SANDER, K. WINTER, P. DE FILIPPI, M. MANNAN, W. REIJERS, Blockchain Technology and the Rule o
H. FREY, A. SUNYAEV, Challenges and Common Solutions in Smart Contract Devel- Code: Regulation via Governance, 2023, available at: https://papers.ssrn.com/
opment, IEEE Transactions on Sotware Engineering, 2022, pp. 4291-4318; G. sol3/papers.cm?abstract_id=4292265. The authors compare the internet and
WOOD, Ethereum: A Secure Decentralised Generalised Transaction Ledger Berlin blockchain technology as technologies that tend to resist traditional regulation,
Version; W. Zou, Smart Contract Development: Challenges and Opportunities, IEEE thereby introducing the concept o ‘rule o code’ as a new regulatory principle
Transactions on Sotware Engineering, 2021, pp. 2084-2106. introduced by blockchain technology. This notion distinguishes itsel both rom
37
To convey the instructions initially conceptualized in natural language to the rule by code adopted by large internet platorms and the rule o law
the computer, a two-step translation process is required. First, the instructions endorsed by states. The rule o code is used to stress that technological ar-
must be translated into the programming language (initial translation). Then, in rangements can be designed in such a way as to eliminate—or at least reduc-
a second phase, this programming language is automatically translated into e—the arbitrary infuence o any single actor (including the state) over the
machine language, which is perormed by computers, known as compilers, that operations o a technological system, as no individual actor can unilaterally
use specialized programs created or this purpose. dictate actions or changes to the blockchain network, including core de-
38
J. SKLAROFF, (note 20). velopers. In other words, through a constitutional lens, no actor has a claim to
39
See: Bank o Italy Occasional Paper n. 863, Characteristics o smart contracts sovereign authority over the network.
44
(M. DORIA, F. BASSAN, M. RABITTI, A. SCIARRONE ALIBRANDI, U. MALVAGNA), July 2024. In this reconstruction, the smart contract is the norm that operates using a
40
One the one side, computer language eliminates the possibility o a fexible code (and whose rules must thereore be respected) within a technological
interpretation o contract perormance, (i.e. duties o good aith or standards o system (the blockchain). When smart legal contracts, which dene the legal
best eorts). On the other side, encoding o smart contracts carries the risk that relationships between two or more parties, operate on the blockchain, the latter
the code might not run as envisaged or contain bugs that will result in mal- also acquires legal signicance. Considering that the blockchain operates as an
unctions. See: Cuccuru (note 15), Giancaspro (note 17), Werbach-Cornell (note autonomous inrastructure with its unique set o rules to which smart contracts
9), Raskin (note 14); Mik (note 9). must adhere, it can be legally classied as an autonomous legal system. Each
blockchain system interacts with others, which introduces the critical concern
o interoperability. Smart contracts specically designed or one blockchain
may not be applicable on dierent blockchain platorms. While current tech-
nological advancements have addressed this issue with progressively sophisti-
cated solutions, they are not yet completely satisactory.
7
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
On a broader scale, the issue arising rom the absence o natural This assumption, however, does not hold true or private block-
language in smart legal contracts, oten reerred to as the ‘dark side’ o chains, where access is restricted and veriying the identity o the parties
these contracts, appears insurmountable. Moreover, rom a dierent is (or should be) an essential requirement. For public blockchains, the
perspective – and to rame it in a language more in line with the sen- issue o potential anonymity does arise. To address this challenge, we
sibility o legal positivists – a thorny question arises concerning the propose the use o logical platorms (see section V).
extent to which the automation o smart legal contracts neutralizes
interpretational fexibility in negotiation rules and adaptability to (iv) The applicability to smart contracts and to smart legal contracts
changing circumstances. o traditional confict-o-laws rules
It is questioned in particular to what extent the automatism o a
smart legal contract excludes fexibility in the interpretation o the In the realm o private international law, the issue raised by smart
contractual rule, the adaptability o the agreement to changing cir- contracts and smart legal contracts is whether traditional confict-o-law
cumstances (‘ecient breach’), and remedies, should the perormance rules are adequate. I they are not, it becomes necessary to determine
go wrong (as in cases o hard orks). which new rules should be introduced.
This aspect has garnered great attention in the international The prevailing legal doctrine holds that the current connecting ac-
debate.45 It is worth noting in this regard that as the provisions within a tors (party autonomy, the law o the closest connection, the lex loci
smart legal contract are not interpreted in accord with the law or the will contractus, and the lex rei sitae) can be applied to smart legal contracts
o the parties and are instead governed by the code o the smart contract, and are sucient.48 For the smart contract code, the lex loci solutionis
the latter might execute a specic set o conditions dened by the code, would apply, which reers to the place o perormance o a smart con-
even i the contract initially intended by the parties necessitated a tract used as a tool in a DLT context.49
dierent type o perormance based on their will and the circumstances. However, in practice, it is dicult to apply the law o the closest
As a result, the execution o smart legal contracts could create a connection to smart legal contracts when the parties are not identied
mismatch between the will o the parties, the provisions established by and their residence is unknown, or when the subject o the transaction is
the traditional legal order (in accord with contract law), and the con- natively digital and thus not tied to a specic location.50 Furthermore,
ditions established by the technological inrastructure o a blockchain or the smart contract code, identiying the place o perormance within
(in accord with its underlying protocol and the smart contract). In this the blockchain (especially i it is public) seems to be challenging.
context, legal scholarship distinguishes between regulation by law and Overriding mandatory rules51 can be applied to smart legal con-
regulation by code as regards their inherent characteristics, such as tracts, much like they are applied to unctionally equivalent legal con-
natural language vs. ormal computable language, amendability vs. tracts outside the DLT. Examples include rules or contracts involving
immutability, and ex-post application by third parties vs. the absence o weaker parties, such as consumer or insurance contracts, or rules pro-
ex-post oversight. hibiting money laundering, terrorism nancing, or tax evasion, as well
These aspects bear great theoretical and practical importance, but at as regulatory rules aimed at maintaining the stability o the nancial
the same time they prove challenging to resolve. However, in the sub- system. However, applying these rules to smart contract code is more
sequent sections o this investigation, we will endeavor to chart a path complex. Nevertheless, the a-territorial nature o decentralized block-
that aligns with the current state o the art and to establish whether there chain (especially i public) raises signicant enorcement issues.
is a way to nd a meeting point between regulation by law and regu- Some o the issues o private international law are addressed by the
lation by code, thus overcoming the opposition that exists between the control that blockchain enables: directly, in the case o private block-
two approaches.46 chains, and indirectly—via logical platorms—in the case o public
blockchains. This structure allows us, on public blockchains, to replace
(iii) The applicability to smart contracts and to smart legal contracts the decentralization typically associated with blockchain with a
o saeguards provided by traditional contract law distributed model. In this model, various logical platorms—which users
access upon identication and, i necessary, KYC (Know Your
From the anonymity o the parties, which blockchain enables, legal Customer), AML (Anti-Money Laundering), etc.—are interconnected.
doctrine derives certain consequences related to the inability to apply to
smart contracts and to smart legal contracts the saeguards provided by
traditional contract law to lack o capacity, or to violations o mandatory
rules regarding duress, mistake, or raud. There are also no saeguards
48
against illegal smart contracts (whose object or eect is against the law) M. EL HARRAK, Do smart contracts need new conict-o-law rules?, in (Ed. by A.
.47 Bonomi – M. Lehmann – S. Lalani) Blockchain and Private International Law,
2023, p. 479-493; A. HELD, Crypto Assets and decentralised ledgers: does situs
actually matter? in (Ed. by A. Bonomi – M. Lehmann – S. Lalani) Blockchain and
Private International Law, 2023, p. 479-493. 209-257; M. HAENTJENS – M. LEH-
45
For an up-to-date overview o the debate, see: M. Blaszczyk, Smart Con- MANN, The law governing secured transactions in digital assets, in (Ed. by A. Bonomi
tracts, Lex Cryptographia, and Transnational Contract Theory. Available at SSRN: – M. Lehmann – S. Lalani) Blockchain and Private International Law, 2023, p.
https://ssrn.com/abstract=4319654 or https://doi.org/10.2139/ssrn.4319654. 456-477.
46 49
P. DE FILIPPI, M. MANNAN, W. REIJERS, (note 43), begin by comparing the Pursuant to Article 12(2) o the Rome I Regulation, which governs the
internet and blockchain technology as technologies that resist traditional choice o law in the European Union (Regulation (EC) 593/2008 o the Euro-
regulation in order to introduce the notion o the rule o code as an alternative pean Parliament and the Council o 17 June 2008 on the law applicable to
to the notion o the rule o law: “We reer here to the rule o code as a new contractual obligations-Rome I) “in relation to the manner o perormance and
regulatory principle introduced by blockchain technology, which distinguishes the steps to be taken in the event o deective perormance, regard shall be had
itsel both rom the rule by code enacted by large Internet platorms, and the to the law o the country in which perormance takes place”.
50
rule o law endorsed by states. […] The rule o code is used to stress the act A KLECZEWSKI, The good, the bad and the ugly: the Private International Law, the
that technological arrangements can be designed in such a way as to elimi- crypto transactions and the pseudonyms, in (Ed. by A. Bonomi – M. Lehmann – S.
nate—or, at least, reduce—the arbitrary infuence o any single actor (including Lalani) Blockchain and Private International Law, 2023, p. 128-155.
51
the state) over the operations o a technological system as no individual actor Pursuant to Article 9.1 o the Rome I Regulation, overriding mandatory
can unilaterally dictate actions or changes to the blockchain network, including rules are “provisions the respect or which is regarded as crucial by a country
core developers. In other words, i we continue to use a constitutional lens, no or saeguarding its public interests, such as its political, social or economic
actor has a claim to sovereign authority over the network.” organisation, to such an extent that they are applicable to any situation alling
47
See: Cuccuru (note 15); Giancaspro (note 17); Werbach-Cornell (note 9); within their scope, irrespective o the law otherwise applicable to the contract”.
8
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
b) How EU Regulation is addressing the open issues critical. Thus, standards, guidelines, and codes o conduct are beginning
Some relevant aspects o smart contracts are beginning to be to ll the implementation gap let by the primary level regulations. This
addressed by EU Regulations on market inrastructure (DLT Pilot52), and necessarily has to occur at a supranational level, also due to the private
on cryptoassets (MICA53). Furthermore, the Data Act54 denes smart international law issues that smart legal contracts raise.
contracts55 and identies specic requirements that they must comply The approach by which regulation proceeds is that o “participatory
with regarding interoperability56 and data sharing.57 regulation”, where regulators and the market work together rom the
However, the European regulations do not address the three aspects initial stages o product and service development.58 The European
o smart contracts highlighted here, which are probably the most Union represents the outpost o this evolution: primary level regulations
(such as the Data Act, the DLT Pilot, MiCA) are implemented through
standards and guidelines adopted by European Standardization Orga-
52
The Regulation (EU) 2022/858 o the European Parliament and o the nizations (CEN, CENELEC, ETSI), by European regulators (EBA, ESMA,
Council o 30 May 2022 on a pilot regime or market inrastructures based on ECB), and by national regulators (National Central Banks, National
distributed ledger technology, and amending Regulations (EU) No 600/2014 Financial Markets Authorities), which are developed together with op-
and (EU) No 909/2014 and Directive 2014/65/EU (DLT Pilot Regime), pro- erators, also using tools such as sandboxes59 and pilots. In some cases,
vides the legal ramework or nancial services based on DLT technology. The international collaboration is more extensive: the Principles on Digital
aim is to remove regulatory barriers to the issuance, trading and settlement o Assets and Private Law adopted by UNIDROIT in 2023 represent a sig-
nancial instruments issued in digital orm and to support regulators in gaining nicant source at present, and hopeully will be implemented by
experience in the use o DLT.
53 member states.60
Regulation (EU) 2023/1114 o the European Parliament and o the Council
Thus, the development o “participatory regulation by technology”61
o 31 May 2023 on markets in crypto-assets, and amending Regulations (EU) No
1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU)
is becoming increasingly signicant. Technology is not just the problem;
2019/1937 (MiCA Regulation). it can also be part o the solution: it enables the provision o guarantees
54
Regulation (EU) 2023/2854 o the European Parliament and o the Council that regulators otherwise could not oer. In this way, technology be-
o 13 December 2023 on harmonised rules on air access to and use o data and comes a tool or regulation.
amending Regulation (EU) 2017/2394 and Directive (EU) 2020/1828 (Data
Act). c) How contracts-on-chain addresses the open issues
55
A smart contract is a "computer program stored in an electronic register Contracts-on-chain aligns with this line o research and develop-
system in which the outcome o the execution o the program is recorded in the ment: the technology used allows, on one hand, to address some o the
electronic register" (art. 2.39), considered a tool potentially capable o questions raised by legal doctrine—regarding the translatability o lan-
"providing data holders and recipients with guarantees o compliance with the
guages, the rigidity o the tool, and its a-territorial nature—and, on the
conditions or data sharing" (par. 1 o the Report - "Background o the proposal -
other hand, to provide solutions that comply with the demands o reg-
Reasons and objectives o the proposal").
56
As or interoperability, Article 33 o the Data Act requires participants in ulators. This includes, or example, ensuring technological development
data spaces that oer data or data services to other participants to provide "the that is consistent with both the current guarantees or contracting
means to enable the interoperability o tools or automating the execution o parties by contract law and the protections or consumers or otherwise
data sharing agreements, such as smart contracts shall be provided" (Article 33 weaker contracting parties (overriding mandatory rules) .62
(1)(d)). The provision provides or a presumption o conormity or smart Due to its fexibility, as it allows the use o blockchain or all
contracts that meet the conditions set out in harmonised standards adopted by contractual phases (KYC, negotiation, stipulation, execution, dispute
European standardisation organisations at the request o the Commission, in resolution) or only or some o them, based on the rules imposed by
accordance with the European Standardisation Regulation (Regulation (EU) No legislators, the guidelines set by regulators, and also the will o the
1025/2012). Moreover, in the absence o such harmonised rules, it is provided
parties, contracts-on-chain—especially when integrated into a logical
that the Commission may adopt, by means o implementing acts, common
platorm operating on a blockchain—is a useul tool to accelerate the use
specications relating to each requirement reerred to in paragraph 1.
57
As or data sharing, Article 36 o the Data Act is addressed to "the vendor o
o blockchain in the eld o contracts.
applications using smart contracts or, in absence thereo, [to] the person whose
trade, business or proession involves the deployment o smart contracts or Part II – From Smart Legal Contracts to Contracts-on-chain
others in the context o executing an agreement or part o it to make data
available". These entities must ensure that the smart contract complies with 4. The underlying need
our key characteristics:(a) robustness: it must have been designed in such a
way as to oer access control mechanisms and a very high degree o robustness The underlying idea o this study is that several o the issues raised by
in order to avoid unctional errors and to resist manipulation by third parties legal scholars can nd solutions through an exploration o the latest
(Article 36(1)(a));(b) sae termination and interruption: it must provide or a
mechanism to interrupt the continuous execution o transactions. In particular,
"[the smart contract must] include internal unctions which can reset or instruct
58
the contract to stop or interrupt the operation, in particular to avoid uture F. BASSAN, Digital Platorms and Blockchains: The Age o Participatory Regu-
accidental executions" (Article 36(1)(b));c) archiving and continuity o data: in lation, in European Business Law Review 34, no. 7 (2023): 1103-1132.
59
the event that it is necessary to proceed with the termination or deactivation o On 14 February 2023, the European Commission launched a European
a smart contract, it is necessary to provide the "possibility to archive the Blockchain Regulatory Sandbox or innovative use cases involving Distributed
transactional data, smart contract logic and code in order to keep the record o Ledger Technologies and/or Blockchains. The initiative is based on the need to
operations perormed on the data in the past (auditability)" (art. 36, par. 1, overcome the current legal uncertainty, caused by a complex governance o the
letter c);d) access control: a smart contract must be protected by means o strict process. The new methodology aims to simpliy and strengthen the dialogue
access control mechanisms at the level o governance and the smart contract between regulators and innovators. Specically, the Commission identies
itsel (Article 36(1)(d));e) consistency: a smart contract must be consistent with regulatory barriers to the roll-out o solutions, and provides advice, expertise
the terms o the data sharing agreement that the smart contract executes and regulatory guidance in a sae and secure environment or participants. In
(Article 36(1)(e)).Seller and/or entrepreneur or proessional are responsible or essence, the Commission will make use o the operators to deepen the technical
ensuring that the EU declaration o conormity complies with the essential re- aspects o these technologies, while the operators will contribute to identiying
quirements o art. 36, par. 1 o the Data Act. The standard also introduces a the best practices or the market, according to the process o participatory
presumption o conormity or smart contracts that meet the harmonised regulation.
60
standards adopted in accordance with the rules o the European Standardisation UNIDROIT Digital Assets and Private Law Principle, 2023.
61
Regulation which impose requirements similar to those o art. 36, par. 1 (art. F. BASSAN, (note 58).
62
36, par. 4). E. Mik (note 9).
9
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
technological advancements. It is precisely the ongoing technological As elaborated urther below, the sotware executed on the public
evolution that provides the answers to many o the inquiries posed. blockchain is accessible and easy to understand, even to a legal proes-
Indeed, third-generation public blockchains possess characteristics sional or anyone tasked with overseeing the activities o private in-
that distinguish them rom earlier-generation blockchains in terms o dividuals. Thus, these individuals can directly veriy whether the will o
quality.63 These advancements are designed to enhance the eciency o the parties has been accurately registered and executed, or they can opt
the inrastructure, which in turn allows the use o a range o tools that, to engage a third party (certier) or this purpose.
or the rst time, bring blockchain closer to real-world applications. As In summary, with the ormula ‘contracts-on-chain’, we reer both to
or contracts, third-generation public blockchains now blend traditional the negotiation process and the outcome o such negotiation. These
contracts with smart legal contracts, the latter being instrumental to the contracts, akin to online contracts (and benetting rom the established
contract’s execution. This approach ensures a user experience resem- user experience), use blockchain technology via a sotware design that
bling that o online contracts in natural language, while simultaneously integrates smart contracts so as to acquire and/or strengthen contractual
oering the robust guarantees inherent to blockchain technology. certainty in the negotiation, underwriting, and enorcement stages. The
In other words our starting point is the need to avoid considering blockchain – on which the contract is composed, discussed, ormalized,
smart legal contracts in isolation. In both legal theory and practical IT and executed – urther emphasizes the value o the negotiation.
implementation, the concept o crating digital contracts that encompass The present investigation will now delve deeper into the ’contracts-
smart contracts is already widely accepted.64 However, a more signi- on-chain’ realm.
cant integration between the two can be realized by reversing the
perspective. 5. The logic platorm on 3rd generation public blockchains
Resorting to blockchain in conjunction with smart legal contracts as
a procedure lays the groundwork or the ollowing actions: i) concluding One o the ramications resulting rom the attributes o the latest
a digital contract in natural language by negotiating the content directly generation o public blockchains is the inherent transparency o recor-
on the blockchain; ii) subsequently uploading it as a hashed document ded transactions: once they are entered into the ledger, they become
onto the blockchain, accessible solely by cryptographic key holders; (iii) visible to all parties. Furthermore, in instances where decentralization is
executing it in part through the underlying technology o smart legal genuinely achieved, it precludes any external oversight over activities or
contracts; iv) organically interlinking it with other contracts. transactions.
In summary, the outcome is a contract concluded on a public These characteristics have prompted certain scholars, particularly
blockchain instead o the (digital) internet, whereby the contract in- those engaged in the world o DAOs (Decentralized Autonomous Orga-
herits the characteristics o the blockchain where it is conceived, nizations),65 to speculate on a novel mode o governance, one which
developed, and used. This approach allows users to directly design the either replaces or complements traditional governance and which has
text o the contract. the potential to democratize not only nance but also the entire society
This new model empowers the parties to negotiate, sign, and execute owing to the decentralized structure on which it is exercised.
– in whole or in part, depending on both the type o contract and the
parties’ needs – a contract written in natural language directly on the
blockchain, not just on the internet as in the case o a normal online 65
A DAO should not be understood as a blockchain network in and o itsel
contract. but rather as an organization which deploys smart contracts on top o an
Through this approach, the entirety o the interactions between the existing blockchain network. They have relatively recent origins. For an in-
parties is recorded and executed on the blockchain i so desired. depth analysis, see S. HASSAN, P. DE FILIPPI, Decentralized Autonomous Organiza-
In comparison to the online contracts rom which they inherit the tions, Internet Policy Review, 2021, pp. 10 ., who describe a DAO as a
blockchain-based system that enables people to coordinate and govern them-
user experience, contracts-on-chain incorporate ‘structural’ elements
selves as mediated by a set o sel-executing rules deployed on a public
that derive rom the blockchain on which they operate. This grants them
blockchain, and whose governance is decentralized (i.e., independent rom
attributes o certainty and security which are contingent on the block- central control). See also B. CARRON, V. BOTTERON, How Smart Can a Contract Be?
chain itsel, while retaining the knowledge and awareness o the parties supra. The authors state that each member o a DAO contributes by bringing his
that is derived rom the use o natural language. own eorts or resources, such as cryptocurrencies, in exchange or tokens. The
Furthermore, the connecting component between natural language member then participates in the decision-making process within the DAO. A
and the blockchain, which is the executed sotware, remains trans- DAO unctions without the need or a management team and can be directly
parent. This sotware is documented on a public blockchain and can be governed by its members according to the rules encrypted in the code. Simi-
accessed through a standard browsing tool on the chain (such as an larly: N. AUGUSTIN - A. ECKHARDT - A. WILLEM DE JONG, Understanding decentralized
explorer) by the relevant parties, interpreters, regulators, arbitrators, or autonomous organizations rom the inside, Spriger, 2023. Today, DAOs relate to a
judges, depending on the circumstances and entities involved. wide array o structures. In terms o governance, some scholars have ocused on
the limitations and challenges that arise rom using this structure over block-
chain technology: J. Z GARROD, The real world o the decentralized autonomous
society, TripleC: Communication, Capitalism & Critique, 2016, pp. 62–77; U.
63
As specied in note 9, we started developing contracts-on-chain in 2019 on CHOHAN, The Decentralized Autonomous Organization and Governance Issues (Notes
a private blockchain (Hyperledger Fabric). Later, in 2022, we opted or a public on the 21st Century) [Discussion Paper], University o New South Wales, 2017,
blockchain (Algorand), mainly because third-generation public blockchains available on https://doi.org/10.2139/ssrn.3082 055; K. T. MINN, Towards
have characteristics that overcome most o the limitations o private block- Enhanced Oversight o "Sel-Governing" Decentralized Autonomous Organizations:
chains and, urthermore, they reduce or eliminate, with appropriate pre- Case Study o the DAO and Its Shortcomings, NYU J. Intell. Prop. & Ent. L, 2019,
cautions, the drawbacks o second-generation public blockchains. pp. 139 .; M. HÜTTEN, The sot spot o hard code: Blockchain technology, network
64
See the ’ELI Principles on Blockchain Technology, Smart Contracts and governance and pitalls o technological utopianism, Global Networks, 2019, pp.
Consumer Protection’ (European Law Institute, 2022. Some models can be 329–348. Others have highlighted the opportunities that the use o DAOs oers:
traced back to the Ricardian contract, a model consisting o a single document, D. ROZAS - A. TENORIO-FORNéS - S. DÍAZ-MOLINA - S. HASSAN, When Ostrom Meets
written in both semantic and computer language such that it can be contex- Blockchain: Exploring the Potentials o Blockchain or Commons Governance, 2018,
tually understood by both man and machine (machine readable). This so-called available on https://eprints.ucm.es/id/eprint/5964 3/1/SSRN-id3272329.pd;
hybrid model is hypothesized by I. GRIGG, The Ricardian Contract, Proceedings o Y. HSIEH - J. VERGNE - P. ANDERSON - K. LAKHANI - M. REITZIG, Bitcoin and the rise
the First IEEE Workshop on Electronic Contracting, 2004, as well as Id. Why the o decentralized autonomous organizations, Journal o Organization Design, 2018,
Ricardian Contract Came About? A Retrospective Dialogue with Lawyers, in J.G. pp.1–16; K. JONES, Blockchain in or as governance? Evolutions in experimentation,
Allen - P. Hunn (eds.), Smart Legal Contracts: Computable Law in Theory and social impacts, and prefgurative practice in the blockchain and DAO space, in In-
Practice, Oxord, 2022, p. 88 et seq. ormation Polity, 2019, pp. 469–486.
10
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
Every time a piece o data is recorded on the blockchain, it is not by the platorm.67 To this end, the platorm operators implement
stored in a singular location but is rather simultaneously distributed whitelisting strategies to ensure that access is granted exclusively to pre-
across all nodes within – depending on the chain – a more or less secure, approved crypto addresses. Subsequently, they proceed to veriy
universal, encrypted, and, indeed, more or less decentralized ledger. compliance with the various legal rules imposed by industry regulations,
This approach serves to eliminate intermediary costs, bolster security, as in the case o anti-money laundering.
and prevent the consolidation o power in the hands o a ew. Moreover, this process serves the dual purpose o ensuring that in-
At present, particularly in the nancial sector, true decentralization termediaries, customers, and incoming unds are pre-veried, thus
still appears to be a distant goal. While digital innovation is advancing guaranteeing that all expressions o intent and transactions – including
rapidly, the digital transition to a ully decentralized environment is not nancial ones that are recorded and executed on the public blockchain –
occurring at the same pace. Condence in new technologies among remain securely, permanently, and immutably traced. As we will
companies and markets is increasing at a slower rate, and it takes time endeavor to demonstrate in this study, controlled-access logical plat-
or regulators, markets, and users to develop trust in new governing orms operating on public blockchains present an appropriate solution
processes. or the ongoing transition rom Web2 to Web3 and will prove valuable in
Notably, although the absence o stringent regulations in the Euro- subsequent phases, when ully operational, in situations where DAO
pean Union serves as a valuable incentive promoting innovation, the models (completely decentralized platorms) are unsuitable or incom-
lack o a minimal and shared level o regulation in the decentralized patible with regulatory prerequisites.
nance (De-Fi) sector indeed hinders market consolidation. In various In this setting, the logical platorm that oers contracts-on-chain
sectors, such as banking, nance, and insurance, where blockchain can allows or the inclusion o a contract text that parties can negotiate on
develop the most relevant applications, there are instances where an the blockchain, ollowing a process similar to the one underlying online
intermediary or supervisory role is still necessary, as mandated by contracts. Alternatively, they can conclude and execute the contract on
regulations. the blockchain, blending some aspects o traditional contract fexibility
This need to oversee economic initiatives and the technology itsel, with the advantages oered by public blockchain, including enhanced
along with its implications, has led the market to establish ’logical certainty and security. This acet pertains to the reedom o the parties to
platorms with controlled access’ on public blockchains, or to resort to determine the content o the contract and select the method o its
private blockchains, which, however, do not oer the advantages – conclusion, provided the contract is lawul, valid, and worthy o pro-
mentioned above - typical o public blockchains.66 tection under the relevant legal system.
On closer inspection, contracts-on-chain can also be used in a private
i) Logic platorms blockchain environment (as we have experimented since 2019 with
Hyperledger Fabric – supra, note 9). Likewise, and in general, these
By ‘logic platorms with controlled access’, we mean digital in- considerations apply to public blockchain environments that lack a
rastructures capable o connecting dierent systems and making them controlled access logical platorm. For the sake o analytical simplicity,
available on one or more public blockchains, through simplied in- throughout this discussion we assume that contracts-on-chain are
teraces. Access is granted to authorized users ollowing an identica- developed within a controlled access logical platorm.
tion and validation procedure, and users can thus access the products This choice aligns with our intention to support the ongoing tech-
and services oered by the platorm. nological transition and provides more detailed analyses and solutions
Logical platorms with controlled access leverage public blockchains, within an environment and a model poised to gain prominence in the
while retaining all the inherent advantages o blockchains. Operators market.
can more easily comply with the rules o regulated markets and avail
themselves o control mechanisms that enhance the level o security and (ii) 3rd generation public blockchains
that make public blockchains them similar to private blockchains in
terms o protection. Access to these logical platorms on the public The technological properties o third-generation public blockchains
blockchain is subject to, among other things, completing a KYC (know assume a crucial relevance or the development o contracts-on-chain, as
your customer) procedure, lling out due diligence and AML (anti- the technology provides some o the necessary guarantees to enable the
money laundering) orms, and using non-anonymous wallets provided integration/hybridization between online contracts written in natural
67
These procedures allow the platorm operators to provide or all orms o
oversight typical o a private blockchain, while overcoming its typical limits.
The result is a orm o regulation over “entry to the platorm” that is consistent
66
On the dierences between private and public blockchains, see supra, Sec- with current industry regulations, combined with a level o security, speed,
tion. 4. scalability, and cost-eectiveness guaranteed by the public blockchain.
11
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
language and smart legal contracts.68 The most important characteris- or payment purposes.72 Delivery vs payment (DvP) mechanisms ensure
tics concern energy eciency, transaction costs, scalability, decentral- the contextuality between perormance and consideration on the chain,
ization, security, transaction nality, the impossibility o orks,69 and signicantly reducing (and in some cases eliminating) the risk o
the contextuality o the exchange between perormance and contractual deault or counterparty risk.73 The immediate nality o the
consideration. transaction, established once recorded on the chain, saeguards parties
In particular: the speed o execution and recording on the blockchain against potential compromise o any block in the chain, preventing –
allows or real-time negotiation between parties.70 Notarization costs ontologically – the possibility o orks or chain splits, thus eliminating
are minimal, also due to the exponential reduction in energy con- the risk o a transaction or a maniestation o will being simultaneously
sumption, allowing or the recording o every step, including negotia- on two dierent branches o the chain, directed at two dierent parties.
tion.71 High scalability (measured by the number o possible The registry is unique and cannot be modied retroactively.74 The level
transactions per second) allows or massive utilization o the tool, even o security o third-generation public blockchains,75 determined by both
the degree o decentralization and the sophisticated encryption utilized
(which is also resistant, prospectively, to the challenge o quantum
computers), ensures integrity and certainty or these blockchains.76
68
H. DIMITRIEVA-M. SCHMIDT-KESSEN, (note 19, at p. 70) correctly stated that: ”the
design o the underlying technology (at least in terms o the identiability o Part III - Contracts-on-chain: smart legal contracts and public chain.
persons transacting on blockchain, the selection o nodes and the size o An empirical investigation
network, the particularities o the consensus mechanism and the transparency
o the content o the blocks) is a signicant eature that needs to be actored
The theoretical system explored so ar has been put to the test
into the discussion. This is a point oten overlooked in legal academic
literature”.
through an empirical investigation involving a third-generation block-
69
As or the Algorand blockchain that we used, see: J. CHEN, S. MICALI, Algo- chain with the aim o addressing various questions posed by legal
rand: A secure and efcient distributed ledger, in THEORETICAL COMPUTER literature that have yet to nd practical solutions. These questions
SCIENCE, v. 777 (2019) p. 155-183, and Y. GILAD, R. HEMO, S. MICALI, G. VLACHOS, encompass topics such as the translation o natural language into ma-
N. ZELDOVICH, Algorand: Scaling Byzantine Agreements or Cryptocurrencies, MIT chine language, the relevance o legal design, and the use o blockchain
CSAIL (https://ia.cr/2017/454). Algorand has build a chain that never orks. or the execution phase o contracts as well as or establishing consent or
More specically, the orking probability is 1018; in essence, i there was one even ormation o the contract. Additionally, the investigation explores
block per second since the big bang, the chain would have probably orked the possibility o anchoring the contract within a legal system, without
once. This is a very clever way to stop the Nothing at Stake problem - i the
chain can’t ork, there aren’t multiple competing chains or validators to vali-
date, and the network remains stable.Algorand builds this "unorkable chain"
72
through a handul o cryptographic techniques (described in the two articles The scalability o the latest generation blockchains is signicant: in act, it
quoted above). The basic idea is as ollows:• One randomly selects one user to goes rom 16 operations per second (Ethereum) to 10,000 (Algorand) but
propose the next block, with the likelihood o selection based on ownership o potentially up to 40,000; to be clear, the latter relates to the order o magnitude
the cryptocurrency, Algos.• Then, one randomly selects 1000 users to vote on o the exchanges o current credit card systems.
73
validating the next block, again with the likelihood o selection based on Algo As or the trade-o between perormance and counterpart perormance,
ownership.• A majority o those users need to validate that block using an and thus the conclusion o the agreement, the third generation o blockchains
"ephemeral" secret cryptographic key, which they immediately delete ater (we have experimented on Algorand) ensures contextuality. Perormance (e.g.,
validation. This prevents two blocks rom both being veried simultaneously. selling an asset) and counterpart perormance (e.g., payment o the price) occur
One o the things that made Algorand unique when it was rst described was its in a single block o the chain (atomic swap). I the two perormances are not
ability to select 1000 users in a decentralized way. They use a technique called recorded in the same block, the operation (e.g., the sale o an asset) does not
’cryptographic sortition’, which is a way o describing a ully decentralized occur. The operational tools o the blockchain thus serve as a guarantee against
lottery. This is done through a cryptographic primitive called a ’veriable the risks o non-perormance (o asset delivery and payment o the price).
74
random unction’. A VRF is essentially a (pseudo-)random number generator, First and second-generation blockchains required, or the completion o a
but unlike conventional PRNGs, it also generates a proo that the random transaction, the generation o several blocks on the chain ollowing the one in
output was generated correctly. Thus, to be selected to participate in the voting which the transaction was inserted. This was to ensure a ’reasonable proba-
committee, a user simply needs to get a lucky draw rom their VRF. The act bility’ that the operation would be inserted into a block located in the ’correct
that it’s veriable means that users can’t lie and pretend that they got lucky; branch’ o the chain, in the event o a ork. Some next-generation blockchains
this gives us a secure, veriable set o 1000 validators.How does this result in a instead ensure the immediate nality o the transaction – denitively once it is
1018 orking probability? Algorand has one major assumption built into it. recorded on the chain – and are thereore compliant with European regulations
For this to work, 2⁄3 o all Algos, the chain’s currency, needs to be controlled by (i.e., settlement nality - Directive 96/28/EC).
75
"honest money", parties who always obey the rules o the Algorand protocol In this writing we are using as reerence the characteristics o the Algorand
without ail. This is vast oversimplication, but the basic idea is that it would be blockchain – a third generation blockchain – which we have specically used
very unlikely or a user with <1⁄3 control o the money supply to not only be since 2022 to continue, on a public blockchain, the development o contracts-
selected to propose a block, but also be a majority o the verication committee. on-chain which were started in 2019 on a private blockchain (Hyperledger).
76
Plus, there are some additional Byzantine Agreement protocols that make it The degree o decentralization o public blockchains is relevant or several
even harder or an attacker to wrest control o the network, which bring the purposes. Firstly, it indicates the limits and thresholds or the validation o
ork probability down to that impressively low value. blocks that are to be controlled. The higher the number o validators, the more
70
Today, a new block is inserted into the chain every 3.2 seconds (re: dicult it is or an attacker to take control o the validation system. This is
Algorand). important because control over who decides on block validation allows one to
71
The costs o each transaction on the Algorand blockchain are equal to establish whether some operations inserted in a block are invalid. Secondly, the
€0.00001. As or energy eciency, the shit rom proo o work (Bitcoin, degree o decentralization aects the governance o the blockchain: the greater
Ethereum beore the merge) to proo o stake, which characterizes third- the number o validators, the higher the probability that they will participate in
generation blockchains, allows or a reduction in energy consumption by decisions on undamental aspects, including development o the blockchain.
several orders o magnitude. The most technologically advanced blockchains The security level o blockchains has grown together with that o the genera-
have an energy consumption equivalent to that o three houses (in contrast, the tions o blockchains and has undergone an evolution that is partly independent
Bitcoin blockchain still consumes as much as the entire Netherlands). For and partly derived rom the development o other characteristics o block-
urther insight into transaction costs, see: A. DELGADO DE MOLINA RIUS, Smart chains. As or the rst element, some third generation blockchains have security
Contracts: Taxonomy, Transaction Costs, and Design Trade-os, in J .G. Allen e P. protocols that use advanced, quantum resistant cryptography. As or the sec-
Hunn (Editors), Smart Legal Contracts: Computable Law in Theory and Practice, ond, the growth in the degree o decentralization and scalability makes it
Oxord, 2022, p. 107 e s. e, spec., p. 121 e s. objectively more dicult to compromise a block in the chain.
12
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
which the contract might risk being essentially a sel-regulating mech- undeniable benets in terms o security, transparency, and transaction
anism.77 This aspect is particularly noteworthy given the recent speed. In support o this conclusion, we will proceed urther by taking up
consolidation o Web2 logic platorms (i.e. social networks), which are the example o an escrow contract, something which presented – in the
becoming a sort o private legal order.78 ormulation o a smart legal contract (supra, Section 3) – severe chal-
To address these questions, we have developed contracts written in lenges in terms o transparency. The contracts-on-chain model innovates
natural language on a public blockchain, taking advantage o the ca- signicantly in this respect, increasing the usability and eectiveness o
pabilities oered by third-generation blockchains. Since this is a public a smart legal contract tool that denes legal relationships between the
blockchain with transparent transactions, we have chosen to use it to parties according to "i-then" logic. In this case, in combination with an
enhance certain elements o contractual certainty without placing the additional "abstraction layer", it oers the user a (party to the contract)
entire contract on the blockchain, thus saeguarding contract fexibility an interace that acilitates interaction.
as requested by the parties to the contract on a case-by-case basis. For The novelty o contracts-on-chain is that they display all the contract
instance, personal data and other identiying inormation o the parties clauses clearly, rather than just providing a representation o the con-
are not disclosed on the public blockchain.79 This choice does not aect tract in natural language while it is in act written in machine language.
the correct implementation o the contract, especially when, as In practice, once a user logs into the logical platorm, she/he enters a
explained, contracts-on-chain are embedded in a logical platorm. system that not only oers a amiliar user experience but is also
Contractual models within the nancial sector were careully remarkably comprehensible on a linguistic level. Contracts-on-chain are
examined and adapted to unction seamlessly on a public blockchain developed in a more complete and complex way than smart legal con-
and made receptive to the use o smart contracts.80 This adaptation al- tracts. The technical/technological components are integrated in the
lows or the ull harnessing o both the unique qualities that public initial phase o the development process as they are essential to creating
blockchains oer as well as their potential contributions to any given a natural language contract that is immediately compatible with the
contract, as we will detail below. Boolean logic o the blockchain.
The intersection between natural language contracts and public This approach entails that the contractual terms are not simply
blockchain – via sotware design, particularly smart contracts – has agreed upon by the parties and then translated into programming lan-
yielded surprising results. This merging appears to provide a secure and guage. Instead, they are collaboratively crated rom the outset by both
ecient approach to the current phase o Web3 development. In a short technical and legal experts and meticulously designed to be executed
time span, the contracts-on-chain model could emerge as an innovative automatically with the highest eciency, taking into consideration the
negotiation process complementing existing o-chain methods, bringing application environment. Consequently, "non-technical" users will rely
on the natural language on the chain, as it perectly aligns with the
underlying unctions o the smart contract.
77 For clarication, we provide the same section o the escrow contract
From a common law perspective, the contract is the unique source o ob-
ligations existing between the parties. Smart legal contracts could thereore, as discussed in the section about smart legal contracts (Section3), con-
albeit with the limitations highlighted above, represent the entire perimeter o sisting o mere lines o code, which has been constructed ollowing the
the constraints between the parties. From the contract norm, however, there is a "contracts on chain" logic.
risk o moving towards a contract-legal order via blockchain, or those who [Subject to Paragraph 4.2 o the Agreement, you are accordingly
believe that the blockchain constitutes a legal system in itsel. According to the requested to pay the Deposited Amount, by [_] as ollows:
theories that transorm the rule o reason into the rule o code, the blockchain
possesses all the tools to ensure correct execution o the contract and allows or (i) The Amount Deposited into the Deposit Account, totaling Euro [],
dispute prevention and resolution. It ollows that a smart legal contract does not is to be remitted to bank account no [_], IBAN [_], registered in
necessarily need to anchor the contractual rule to a third-party, a state law, or a
the name o the Beneciary and held at [_];
given jurisdiction. The phenomenon, however, is neither new nor attributable
(ii) A portion o the Deposited Amount, amounting to Euro [_],
to blockchain. Already in Web2, in act, the relationships between digital
platorms and users had oten been unmoored rom national jurisdictions.
designated as a Deposit Fee, should be transmitted to a bank
78
On this point see F. BASSAN, Digital Platorms and Global Law, 2021, cit. Some account o your choice under your name.
digital platorms (especially the ’closed’ ones, such as social networks) operate
with users on the basis o rules that the platorms themselves have dened (or Upon ullling the aorementioned payments, you are also requested
example, with regard to admissible written or visual content) and which they to provide us with a conrmation ENCLOSING EVIDENCE OF THE TRANSACTION
are able to execute eectively (by obscuring accounts, i necessary), with these AND A STATEMENT OF THE DEPOSIT ACCOUNT CERTIFYING THE UPDATED DEPOSITED
platorms also providing very articulated systems o dispute resolution. As or AMOUNT, ollowing the provisions o Paragraph 4.5 o the Agreement.
the relationship between digital platorms and their users, public systems (e.g. [Beneciary]
the European Union with the Digital Services Act) have recognized the inde- Name: [_]
pendence o platorms, requiring compliance with general principles and, in
Title: [_]
act, collaboration between the two legal systems (the private one o digital
[Depositor]
platorms and the public one o the European Union).
79
On the public blockchain, only a recorded hash (#) identies the contract
In the contracts-on-chain version, this clause allows the user to
in the state in which it is sent to the chain. On the one hand, this allows the engage in direct contractual negotiations on the blockchain and actively
parties to prove (and the platorm operator to veriy) that the contract identi- and consciously participate in all phases ollowing stipulation. The
ed with that hash is indeed the one in their possession. On the other hand, the platorm provides users with the necessary tools to customize and
contract is not recorded on the blockchain, so that it remains available only to determine the execution fow o the contract. The user-riendly interace
the parties, who will be able to store it on premise or use one o the available incorporates elements (such as special ‘buttons’, akin to those ound in
cloud storage systems. Each modication o the contract will result in a common applications) that correspond to activities that can be per-
dierent version thereo, which will be recorded and identied on the block- ormed based on the terms established during negotiations. For instance,
chain with a dierent hash. It ollows that no personal data is recorded on the parties can authorize the release o the deposited amount i they believe
public blockchain, nor are elements that allow third-parties other than the
the agreed-upon activity has been satisactorily carried out, or they can
parties to the contract and the platorm operator to directly identiy the parties.
80 suspend the execution, transerring any fawed phases o-chain (see
This involved: (i) a rst phase o contractual simplication, so as to make it
amenable to both translation into machine language and execution according to Fig. 1).
binary logic, and (ii) a second phase involving the transormation o some All in all, with contracts-on-chain, users have access to a technology
contractual clauses to make them sel-executing upon the occurrence o certain that enables them to operate independently, without the intervention o
events (on-chain or o-chain). specialized third parties, while also beneting rom the advantages
13
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
Fig. 1. Contracs-on-chain dashboard.
oered by the public blockchain as urther enhanced by the saeguards veriy it, either through conventional methods like inspection by an
provided by the logical platorm. expert or, conceivably, by implementing Suptech procedures.81
Contracts-on-chain enable the alignment o every clause in the nat- Hence, the distinctions between ’Ricardian contracts’ (including
ural language contract with a corresponding logical clause within the hybrid contracts) and contracts-on-chain become quite evident, along
smart contract. This alignment is achieved through the establishment o with the novel elements introduced by the latter. ’Ricardian contracts’
a direct 1–1 match (mapping) between the natural language clause and are essentially a orm o sotware design; they are neither true contracts
the smart contract clause. The ollowing section o code pertains to the nor split contracts.82 They were rst developed by Grigg in 1996, beore
button labeled ‘Request release o the deposited amount’, as indicated in the rise o blockchain technology, making them independent o it.
Fig. 1. This button allows users to execute the relevant unction with a
single click.
onst nlProposRls = () => {
81
onst rpPrms = { In this regard, and specically or the SupTech evolution, see M. RABITTI - A.
SCIARRONE ALIBRANDI, RegTech and SupTech, Articial Intelligence and Law: A
n: ’propos_rls’,
Revolution?, edited by A. Pajno, F. Donati A. Perrucci, V. III, Intellectual Prop-
rs: { ms},
erty, Society and Finance, 2022, pp. 451.
onSussMss: "Rqust to rls t Amount 82
It is thereore worth clariying that we do not intend to reer here to the
Fl omplt", ’Ricardian contract’ nor the ‘split contract’. The Ricardian contract puts a legal
molConrmMss: agreement in a ormat that can be expressed and executed in sotware,
"You r out to rqust t rls o t Dpost including making it machine-readable and ordinary text-readable. The com-
Amount, ponents o a Ricardian contract are disaggregated as ollows: 1. a contract is
Do you wnt to onrm your o?", oered by an issuer to contract holders; 2. It is held or a valuable right by
}; holders and managed by the issuer; 3. It is easily readable on paper and by
stRpPrms(rpPrms); programs; 4. It is digitally signed, carrying the keys and server inormation, and
}; is allied with a unique, secure identier (hash). Thus, the ’Ricardian contract’ is
not a contract model but a sotware design, created in 1996 by I. Grigg to record
Since the code is readable and openly available on the public
the parties’ intention to reach an agreement and to connect this representation
blockchain and can be veried with any blockchain exploration tool
o the will to third-party systems (i.e. accounting sotware) so as to give it legal
(explorer), the matching between the contractual clause in natural eects. Recently, among external systems, it has become possible to use
language and its corresponding logical clause within the smart contract, blockchain. This allowed the creation o a new version o the design sotware
which constitutes its translation and execution, is eortlessly conrm- which is known as a Ricardian contract (a so-called ’hybrid’ version) charac-
able. This verication can be conducted not only by the involved parties terized by three elements: prose, parameters, code (Ricardian Triple): I. GRIGG,
but also by an arbitrator or a judge. Furthermore, i the subject matter The Ricardian Contract, in Proceedings o the First IEEE Workshop on Electronic
alls under the oversight o a sectoral authority, that authority can also Contracting, 2004, and ID. Why the Ricardian Contract Came About? A Retro-
spective Dialogue with Lawyers, in J . G. Allen - P. Hunn (Editors), Smart Legal
Contracts: Computable Law in Theory and Practice, Oxord, 2022, p. 88 e ss. And,
equally, we are by no means reerring to the ‘split contracting model’, which,
unlike the ’Ricardian contract’, immutably connects the contract in written
orm, understandable by humans, with the architecture – which remains
separate – o smart contracts, understandable by the machine that administers
its execution.
14
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
Recently, the integration o smart contracts with Ricardian contracts has contract, with even basic coding knowledge being sucient or such an
allowed them to evolve in line with blockchain, although they still ace inquiry.
limitations due to their inherent rigidity (the contract is identied by a An alternative solution might involve incorporating mechanisms or
single hash). both ex-ante and ex-post verication. For example, parties could have the
Conversely, contracts-on-chain are real contracts that shit the option o requesting certication o the correspondence between text
concept o smart contracts, including smart legal contracts, rom the signed o-chain and its encoded counterpart. This certication could be
realm o theory and technology into potentially widespread practice. obtained rom a trusted third party, hypothetically the logical platorm
Contracts-on-chain exist solely within the blockchain, making it an operator. Alternatively, an oracle, whether operated by the platorm
essential component. In this practice, the contracting parties utilize itsel or by a third party mutually agreed upon by the parties, could be
tools, methods, and models widely established and amiliar rom online charged with validating the consistency between the natural language
contracts, complemented by the elements inherited rom the blockchain and machine language text on the blockchain. This validation process
on which they operate. could result in a compliance certicate, which would then be recorded
Contracts-on-chain take advantage o the recent evolution o third- on the blockchain, and thereby carry signicant evidentiary eects.
generation blockchains (Section 5. i)), which are scalable, economical, This solution, aimed at acilitating consistency checks between the
and energy-ecient. This allows every exchange between parties to be rst and the latest (negotiated) version o the contract, can also bene-
recorded on a public blockchain, including negotiations, signatures, cially address the broader issue o non-IT-savvy contractors not being
contract modications, execution (whether partial or ull sel- aware o the terms and conditions o the concluded agreement. In this
execution), also using native blockchain tools or resolving disputes. way, it would eectively eliminate "translation errors" at their source,
Each step can be recorded on the blockchain based on the requirements allowing parties to enjoy the advantages o placing contracts on the
set by legislators, regulators, or the preerences o the parties involved. public blockchain without exposing themselves to the associated risks.
The fexibility o contracts-on-chain ensures that parties have com- Furthermore, it is worth noting that the eort required to clariy and
plete ’internal control’ o the tool. This fexibility is urther enhanced by simpliy the language, essential or converting contractual clauses into
integration with logical platorms (Section 5 i)) that enable ’external code in an on-chain contract, may, in some instances, introduce limi-
control’ through access requirements to the platorm. tations on the degree o execution fexibility. Nonetheless, this approach
The next section will delve into how this relates to the specic can help to overcome the inherent ambiguity oten associated with
characteristics o these contracts. contractual terminology.83
6. The eatures o contracts-on-chain: the premise ii) The infexibility o smart legal contracts
The possibility o veriying linguistic correspondence between The second paramount concern, as previously mentioned, revolves
computer code and natural language is undeniably a crucial element in around the (in)fexibility inherent in smart legal contracts, especially
ensuring respect or the parties’ intentions. To emphasize this point, we when a need to renegotiate has arisen as a result o unoreseen cir-
urther explore the impact o this novel approach to drating, cumstances, integration requirements, a party’s withdrawal rom the
concluding, and executing contracts – which we reer to as ‘contracts-on- contract, or exceptional or “pathological” circumstances necessitating
chain’ – on the issues raised by legal scholars regarding the concept o contract interruption. It is generally acknowledged that smart legal
smart legal contracts. In particular, it bears examining the issue o contracts are a means to transcribe the terms and conditions agreed
translation risk (language), the prole o (in)fexibility, and the appli- upon by the parties into code and store them within the blockchain,
cability to smart contracts and to smart legal contracts o saeguards thereby rendering them veriable, immutable, and irrevocable. From
provided by traditional contract law, as well as the applicability o this perspective, the rigid nature o smart legal contracts raises questions
traditional confict-o-laws rules. about their capacity to accommodate and apply rules related to
contractual deciencies, including nullity and termination.
(i) Translation risk The most advanced blockchains now oer a certain degree o
adaptability and revocability. They permit modications o smart legal
It is commonly asserted that a seemingly insurmountable limitation contracts – even during their ormation – i the option to revoke, modiy,
o smart legal contracts, which are typically written in a manner or cancel is embedded in the code rom the outset. This means that smart
comprehensible only to engineers, is their potential ailure to meet the contracts still provide a measure o fexibility. Contracts-on-chain,
requirements o clarity, comprehensibility o contractual texts, and, in however, oer an additional eature: they allow the parties, in
the nancial sector, inormation transparency. response to expressed needs (including needs articulated by a single
One tangible risk arising rom this scenario is that smart legal con- party that have been deemed legitimate by the counterparty, an oracle,
tracts may provide and execute in a manner dierent rom the intentions or a judge – even o-chain), to modiy an already concluded agreement
expressed by the parties in the natural language contract. In such a case, and replace the old smart contract with a new one that can be negotiated
the automatic execution inherent in smart legal contracts might give directly on the blockchain.
priority to the code written by the person who authored the smart
contract over the intentions o the contracting parties. We can consider a
scenario where the parties agree on a purchase price or an asset via 83
Many believe that it is precisely the vagueness o clauses such as ’best e-
blockchain and the smart legal contract’s translation inadvertently al- orts’ or ’good aith’ that make it dicult to utilize smart contracts in complex
ters the amount to zero or to another unintended value. When the pre- contractual arrangements. See, among others: C. PONCIBò – L. DI MATTEO, Smart
determined condition is met, the automatic execution results in an Contracts Contractual and Noncontractual Remedies, The Cambridge Handbook o
incorrect outcome. This represents a potential error not by the parties, smart contracts, blockchain technology and digital platorms, (L. DiMatteo et al,
eds., 2020), p. 120-121; p. CATCHLOVE, Smart Contracts: A New Era o Contract Use,
but rather by the "translator" – an error that remains hidden rom the
2021, available on https://ssrn.com/abstract=3090226; M. RUDANKO, Smart
parties’ view.
Contracs and Additional Contracts: Views o Contract Law, Smart Contracts:
Nonetheless, this issue can be resolved by applying the contracts-on- technological, business and legal perspectives, M. Compagnucci et al. eds., 2021,
chain model within a logical platorm that operates on the latest gen- pp. 59 .; L. DI MATTEO, Smart Contracts and Contract Law, The Cambridge
eration o public blockchains. These platorms are open source and Handbook o smart contracts, blockchain technology and digital platorms, (L.
transparent and allow anyone authorized by the parties (such as plat- Di Matteo et al, eds., 2020), pp. 8.. It will be seen, below, how contracts-on-
orm operators) to veriy the consistency between the two versions o the chain can overcome these limitations (Section 14, dispute resolution).
15
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
At the same time, the operation remains recorded on the public The identication o a user on a public chain is typically done with a
blockchain, which documents the entire sequence, including all changes wallet, mainly to carry out transactions. Identiying the parties to a
made during the liecycle o the contract. In this way, contracts-on-chain contract on the blockchain requires additional steps, which a logical
transorm a undamental limitation o smart legal contracts (rigidity) platorm on the public chain can guarantee.84 Some scholars who have
into a tool (irreutable registration) that can be employed, especially in studied smart legal contracts have raised concerns about the diculty o
the event o "pathological" scenarios. identiying and conrming the legal capacity and competence o par-
ticipants, particularly in cases where certain blockchains potentially
(iii) the applicability to smart contracts and to smart legal contracts allow anonymous, pseudonymous, or even untraceable actions.85 While
o saeguards provided by traditional contract law, this challenge might theoretically exist in the context o decentralized
public blockchains, it is likely to be mitigated or resolved when
As we mentioned, or public blockchains, the issue o potential an- employing the contracts-on-chain model within a logical platorm. In
onymity does arise. To address this challenge, we propose the use o this model, the entity operating the platorm can, and oten must,
logical platorms (see section V). We believe that using logical platorms authenticate the identity and legal capacity o the involved parties.86
on a public blockchain is the best way to showcase the potential o Regardless o whether a logical platorm is in use, contemporary elec-
contracts-on-chain. Access to these logical platorms requires successul tronic and digital identication tools, as well as native blockchain so-
completion o various procedures, including participant identity veri- lutions, can eectively address these concerns.
cation, KYC procedures, and AML regulations. This ensures that a public The advantage o using the public blockchain is rooted in the
blockchain can oer the same saeguards as a private blockchain, while enduring nature o identication records. Once an identity has been
still beneting rom the superior security, decentralization and scal- established and veried, it remains permanently documented on the
ability o a public blockchain. Essentially, the logical platorm mitigates blockchain. Even when concealed by hashes, a maniestation o intent or
the risks associated with a public blockchain while providing the gua- a transaction can always be traced back to a specic natural or legal
rantees o a private blockchain. Furthermore, the modular use o person. While it is possible to modiy identication or uture contracts
blockchain or purposes such as identity verication, negotiation, undertaken by the same party, the public blockchain keeps records o
agreement, execution, and dispute resolution—whether required by the past identications. This persistence occurs because the identica-
legislation, regulators, or the parties involved—makes contracts-on- tion process is carried out via smart contracts and thus inherits their
chain a highly fexible tool. Contract law applies ully to contracts-on- characteristics, as discussed earlier (see Section 6).
chain because, in parts where blockchain is not used, traditional legal
principles apply, and in parts where blockchain is used, it ensures all 8. Contract ormation: negotiations
legal guarantees are met. As we will demonstrate, using blockchain can
actually enhance these guarantees through regulation by technology. As previously mentioned, third-generation blockchains oer the
Thus, the combination o the Algorand inrastructure (a third- advantage o low transaction costs and almost instantaneous execution
generation public blockchain) and the logical platorm ensures that speed,87 which allows each step o the negotiation and contract orma-
contracts-on-chain can be ully recognized and governed by contract tion process to be recorded in an ecient, cost-eective, permanent, and
law. immutable manner.88
From this perspective, the possibility o negotiating the content o
(iv) the applicability to smart contracts and to smart legal contracts the contract directly on the blockchain is also important in assessing the
o traditional confict-o-laws rules
The combination o the 3rd generation public blockchain with the
logical platorm and the contracts-on-chain negotiation tool also allows
or the ull application o the current tools o Private International Law.
The connecting actors (party autonomy, the law o the closest 84
Supra, Section 5.
connection, the lex loci contractus, and the lex rei sitae) can be applied 85
Public blockchains are characterized by the publicity and transparency o
to contracts-on-chain. transactions, which take place in pseudonymous orm. The addresses o the
The lex loci solutionis would apply as well, or the place o peror- transeror and transeree are public, unlike the identity o the subjects who
mance can be always identied. This helps resolve uncertainties about control the private keys o the crypto-assets associated with them. Moreover,
the location o the object when it is inherently digital. there exist some technological solutions that guarantee anonymity, especially
Similarly, overriding mandatory rules can be applied to contracts-on- or the purposes o circulating virtual currencies. For example, privacy coins
chain. (Monero, Zcash, Dcash), mixers, tumblers and other tools that obuscate the
traceability o transactions. Obviously, many o these instruments raise con-
In the ollowing sections, we will explore how contracts-on-chain,
cerns, as they do not comply with the current regulation on transparency and,
operating on a logic platorm, on the one hand address questions
or example, AML. By contrast, the Contracts-on-Chain model inserted within a
raised by legal scholars regarding the compatibility o contractual rules logical platorm, moves exactly in the direction imposed by current legislation.
and smart legal contracts and, on the other hand, help to reduce – and 86
Obviously, the role played by the operator o the logical platorm can also
under certain proles, eliminate – issues related to translation risk, the more broadly encompass all the unctions o a Qualied Trust Service Provider
infexibility o smart contracts, the applicability to smart contracts and (QTSP – according to eIDAS semantics) which – owing to training, audit bur-
to smart legal contracts both o saeguards provided by traditional dens and accreditation – can also be undamental in the decentralized world
contract law, and o traditional confict-o-laws rules; all aspects which when it comes to guaranteeing: a) the identity o the parties; b) storage o the
have so ar limited the use o blockchain or contractual purposes. cryptographic keys used in transactions; c) security, and d) an understanding o
We will rely on the model presented by the Italian Civil Code, which the contents.
87
The relevance o transaction costs is thorough analyzed by A. DELGADO DE
serves as a civil law ramework, primarily ocusing on the aspects o
MOLINA RIUS, Smart Contracts: Taxonomy, Transaction Costs, and Design Trade-os.
agreement, ormation o consent, object, and orm.
In: Smart Legal Contracts. Edited by: Jason Grant Allen and Peter Hunn, Oxord,
2022.
7. Identifcation and capacity to act 88
Supra, Section 6.
The rst issue relates to the need to identiy the contracting parties
and to ascertain whether they are competent to enter into agreements.
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F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
exact perormance o the parties.89 consequences or the parties involved.
More generally, the concept o ‘notarization’ during the negotiation However, the technical characteristics o public blockchain and
phase holds signicant importance, especially in a civil law jurisdiction, smart legal contracts lead us to emphasize once again that not every
where the principle o good aith in contracts permeates all aspects o contract can benet rom stipulation and execution on this inrastruc-
the parties’ conduct and judicial reasoning. Under civil law, the obli- ture. This platorm is most advantageous and eective or contracts that
gation to act in good aith during negotiations, aligning one’s conduct place a premium on notarization, or contracts containing stipulations
with principles o loyalty and airness, entails pre-contractual liability in that are relatively immutable, and or contracts eaturing contractual
the event o rule violations. clauses that have the ability to sel-enorce. It is within this context that
Under the ramework that we have outlined, involving a logical the contracts-on-chain process endows these eatures upon contracts
platorm operating on a 3rd generation public blockchain, the various drated in natural language on the blockchain, thus aording parties the
stages o contract ormation are meticulously documented and made ability to combine the advantages o traditional/digital contracts with
accessible to a judge or arbitrator as necessary. These legal proessionals those o smart legal contracts.
are to review the contractual agreement and scrutinize the conduct o Indeed, contracts-on-chain can leverage the rigidity o the block-
the parties throughout the contract’s entire liecycle. This detailed re- chain to ensure the certainty and security o activities that are notarized,
cord o events, rmly entrenched within the blockchain, stands as secure while at the same time giving parties the fexibility they deem appro-
and incontrovertible evidence o the contractual history. This multi- priate, thus, or example, allowing them to modiy the contract when
aceted capability – documenting the negotiation and pinpointing certain conditions occur.
accountability, particularly as might relate to a breach o the good aith Contracts-on-chain exhibit remarkable eciency, especially in sce-
principle – greatly acilitates the negotiation process narios involving business contracts, such as escrow arrangements, as
An illustrative example pertains to a breach o the obligation to previously explored. They are also highly suitable or standardized
provide inormation, notably in cases involving specic pre-contractual contracts encompassing various domains like investments, nancing,
or contractual disclosure requirements within domains such as banking, insurance, and consumer credit; their adaptability to conventions and
nance, and consumer contracts. Access to the blockchain ecosystem ramework agreements should also be stressed. Furthermore, they serve
oten urnishes ample evidence to ascertain the proper ulllment o well in specic consumer contracts, notably within regulated sectors
these obligations. The potential integration o contracts-on-chain within such as communications, energy, water, and waste management.
a logical platorm serves to notably alleviate the burden o proo, thus The value o smart legal contracts in the orm o contracts on chain is
streamlining the assessment process. that they seamlessly acilitate/urther a process whereby the initial
For instance, in the context o an investment contract, contracts-on- negotiation phase is conducted and completed directly on the block-
chain have the potential to ensure adherence to regulatory requirements chain. When the parties have successully reached an agreement, the
on disclosure and regarding the conduct o nancial intermediaries in contract requests the endorsement by signature o both parties or valid
the realm o investment contracts, as stipulated by MiFID 2 and the and partial execution. This endorsement can be accomplished with
investor protection regulations delineated in the Italian TUF (Consoli- common tools designed or advanced or qualied digital signatures, or
dated Law on Financial Intermediation). I parties opt to embrace the even via native blockchain signature tools. As with digitally signed
contracts-on-chain model, the verication o whether prerequisite in- contracts, these signatures possess a robust level o authenticity that is
ormation has been accurately conveyed, and whether it has been pre- dicult to disprove except in the case o identity thet.
sented in a clear and comprehensible manner, is acilitated, given that In third-generation blockchains, characterized by high speed and
this inormation is securely logged on the blockchain complete with a exceptionally low costs, individual clauses are proposed and accepted
timestamp. Moreover, i a contract clause adhering to legal obligations is directly on the blockchain ater having been initially drated in natural
subsequently integrated into a smart contract within the domain o language and gradually inscribed onto the blockchain using smart
contracts-on-chain, it will autonomously execute its obligations in con- contracts that mirror the content o the agreed-upon clauses. Conse-
ormity with the law. quently, these smart contracts execute the contract in compliance with
From an alternative perspective, the blockchain serves as a valuable the terms agreed upon by the parties. The contract, which has been both
tool in identiying potential unair clauses within consumer contracts. negotiated and concluded directly on-chain, undergoes ull recording
These terms have no legal or binding orce on consumers because they throughout its phases on the public blockchain, thereby preserving a
are void, due to European law. Blockchain enables the elimination o comprehensive record o all contractual negotiations, including the
unair terms through a designated kill unction when implemented proposal and acceptance. Within the blockchain environment, the text o
within smart contracts or by way o a declaration by a judge or oracle. the negotiations and the nal signed contract are available in PDF
ormat, shielded by a hash and encryption that ensures the security and
9. The process o concluding contracts-on-chain. Agreement and integrity o the enclosed data. Once nalized (concluded) and when the
orm specied conditions are met, the contract will be sel-executing, i.e. it
automatically enorces the agreed-upon terms as established by the
Through the adoption o contracts-on-chain, the parties elect to contracting parties.
employ a distinctive procedure or contract conclusion. This choice is In the context o the ramework outlined herein, it is noteworthy that
not predicated on a deviation rom the conventional proposal and the academic debate on smart legal contracts, devoid o the contract-on-
acceptance mechanism but rather arises rom its execution on the public chain structure, tends to conceptualize smart legal contracts as being
blockchain, which gives rise to a novel negotiation mechanism as an akin to contracts that are concluded at the inception o execution. To
expression o private autonomy. In certain regards, this mechanism can describe how contract negotiation and conclusion would take place
be expected to have an impact/a positive impact on the legal within the contracts-on-chain paradigm and to identiy the practical-
ities, we shall consider the example o an escrow contract. Specically,
we will illustrate the evolution o negotiations occurring between the
89 involved parties concerning the deposited amount. The inherent capa-
See: M. DUROVIC-A. JANSSEN, The Formation o Blockchain-Based Smart Con-
bility o contracts-on-chain acilitates the individual participation o the
tracts in the Light o Contract Law, (2018) 26 European Review o Private Law
753; M. CANNARSA, Interpretation o Contracts and Smart Contracts: Smart Inter- parties, allowing them to directly enter or modiy the desired amount
pretation or Interpretation o Smart Contracts? (2018) 26 European Review o within the text o the contract (see the gures, below). Upon attaining
Private Law 773; R. CARIA, The Legal Meaning o Smart Contracts, (2018) 26 through this mechanism a consensus on the terms subject to negotiation,
European Review o Private Law 731. the contract is signed and executed on-chain, achieving ull operational
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F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
status and binding both parties in its denitive version.
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F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
already existing ‘simple electronic signature’ (FE) or ‘advanced elec-
The distinction between contracts-on-chain and smart legal contracts tronic signature’ (FEA) – as the instrument that guarantees the highest
is clear-cut. Smart legal contracts, due to their purely coded nature, are level o security in terms o authenticity, integrity, and non-repudiation.
not comprehensible to the parties involved. As such, they do not acili- The QES makes use o cryptography and provides or the use o a
tate direct on-chain negotiation, regardless o whether or not they are qualied certicate. From a legal point o view, a qualied electronic
drated according to a hybrid model. It is, urthermore, worth high- signature is, or all intents and purposes, equated to a handwritten
lighting that the use o a hybrid model does not eliminate the risk o signature. Thereore, it will be up to those who challenge its validity to
language discrepancy. By contrast, contracts-on-chain represented in a prove the non-existence o the signature.
code language may appear as ollows: Furthermore, as concerns the interests being saeguarded and pro-
uptrmntrt: moted, rom a unctional perspective the emphasis lies on the objective
Proto 6 0 o protection (the end) rather than on the technical solution (the means),
llsu sttsnotton with the latter relating to the traceability o the document to its author
// Armnt rt must n Notton and the suitability o the chosen mechanism to ensure the security,
(WRONG_STATE) integrity, and immutability o the document. An evolutionary inter-
Assrt pretation o digital identication in this direction is appropriate, also in
txn Snr view o the rapid pace o technological solutions.
llsu ssrownt
// Cllr must t Esrow Ant (WRONG_SENDER) 11. Negotiation link
Assrt
[…] Contracts are initiated, undergo negotiation, are concluded and
rm_ -4 executed, oten have dierent parties, ollow dierent models and rules,
nt_0 // 0 and are subject to dierent jurisdictions.90 A contractual linkage – a
> undamental construct/institution or complex contractual transactions
// Amount must rtr tn 0 (WRONG_AMOUNT) – comes into existence when autonomous contracts, each with their own
Assrt purpose (causa), become part o an overarching operation aimed at
[…] realizing an additional purpose separate rom that associated with the
yt_3 // "mount" individual contractual purposes o each linked contract.
rm_ -4 As a result, the unctional connection between contracts is signicant
pp_lol_put in that they must be regarded in respect o the practical outcome they
collectively aim to attain, given that the overall unction binds the entire
10. Probative value transaction. This rst objective requirement is coupled with a subjective
one that entails the shared practical intent o the parties, who desire not
The possibility o retracing a document to a specic person depends only the customary consequences o the specic transactions but also an
on the recognition system. The strength o the security guarantee de- additional purpose. It ollows that: (i) to assess the lawulness o the
pends on the type o signature used, which determines dierent legal economic transaction undertaken, regard must be given to the overall
eects. Specically, in terms o reliability and security, the strength o unction/purpose o the transaction, whereby the identity o the parties
the signature lies: (i) in the complexity o the signatory identity veri- is not required; (ii) when interpreting the contract, account must be
cation system and (ii) in the possibility o proving that the document
corresponds to the one that was signed. Based on these criteria, the
eIDAS Regulation (EU Regulation 910/2014 on electronic identication
90
and trust services or electronic transactions in the internal market) This choice is made either according the will o the parties, when expressed,
recognizes the ‘qualied electronic signature’ (QES) – and not the or in the absence thereo, in light o the connecting actors established under
private international law.
19
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
taken o the priority o interests resulting rom all the linked contracts; events, the parties can make use o public and objective reerences or
(iii) when assessing the merits, lawulness, and validity o the trans- validation. For instance, the determination o the interest rate o a loan
action, it is necessary to look at the set o interests concretely established agreement might be linked to a predened variable (e.g. EURIBOR). In
by the parties. other cases, when the occurrence o the condition or event is not tied to
Contracts-on-chain guarantee a genetic and unctional contractual an objective public reerence, the parties may opt to have a trusted
link that is automatic and permanent. It is sucient to use the public mechanism provide verication: the oracle. The oracle could periodi-
blockchain to record (with a timestamp) the link between two or more cally conrm that specic o-chain events have occurred in a sales
contracts, thereby ensuring that each contract becomes eective and contract, such as the delivery o goods to the carrier, successul customs
enorced only when the other contracts do so at the same time. The use clearance, and handovers to the purchaser without dispute. The oracle is
o natural language, which characterizes contracts-on-chain, allows the responsible or recording these o-chain events on the blockchain.
parties to the dierent contracts to easily review the content o the Moreover, even the counter-perormance (the non-characteristic
agreements and directly monitor the progress o multiple contractual service), i it consists o the payment o a price, can occur either on-
negotiations, which are all linked and accessible rom their dashboard. chain (when the payment is made in crypto-assets,91 in accord with
The link between the contracts will also be partially visible (limited here the latest European denition, or cryptocurrencies92) or o-chain (i the
to sel-executing clauses) on the blockchain, as the conditions provided payment is made in FIAT currency).93
or by one contract will be automatically incorporated into another When both perormance and counter-perormance occur on-chain,
linked contract, orming a condition or its execution. third-generation blockchains aord an ’atomic’ exchange, which
This link, once recorded in the blockchain, remains permanent, as either takes place in the same block or does not occur at all. The tech-
does the execution via smart contract. This principle holds even in the nical revolution that blockchain unolds, concerning not only real-world
case o complex relationships involving multiple parties. Suppose that a contractual aairs but also alternative solutions thereto, is crystal clear.
contract o sale is linked with (i) a contract or the transport o goods, (ii) It guarantees the immediacy and ’nality’ o the transaction and reduces
an insurance contract, (iii) guarantees (or both parties, iv) possibly also or eliminates the risk o deault by the parties. Moreover, i integrated
an escrow contract, and (v) nancing or the buyer. into a logical platorm, the transaction does not entail a counterparty
In this case, the public blockchain appears to oer the means or risk, because any operations on the platorm presuppose the prior
ensuring that these contracts can be negotiated, signed, and executed on identication o parties, assets, and wallets.
the blockchain only where they are part o a unied block. In other The Proposed European Data Act also requires smart contract
words, the negotiation o each contract will be documented on chain,
and the signature o the parties to a contract can deemed valid only
where it enters the chain at the same time as the signatures o the other
parties to all the other linked contracts. All signatures are recorded
within the same block.
Contracts-on-chain serve the purpose o providing an eective
compliance tool. For instance, consider an investment contract designed
to execute only ater a positive verication o the completion o the
MiFID questionnaire by the investor within the applicable deadlines
(with such verication also subject to registration on the blockchain)
and ater establishing the suitability o the investor to enter the contract,
as based on the outcome o the questionnaire. All o this, recorded on the
public blockchain, remains permanently veriable, as the two actions
are intertwined to ensure the highest level o compliance with 91
The well-established denition o crypto-assets can be ound in the MiCA
regulations. Regulation, which provides a harmonized regulatory ramework or crypto-
assets at European level. Art. 3(1)(2) o MiCA describes crypto-assets as “a
12. Execution digital representation o value or rights which may be transerred and stored
electronically, using distributed ledger technology or similar technology”.
One o the advantages o public blockchain is that the contract can be “Digital representation o values or rights” includes tokens (cryptocurrency,
partly executed in an automatic, certain, transparent, secure, cost- utility tokens, security tokens, non-ungible tokens). The Regulation, however,
eective, and immutable manner (supra, para 6). The automatic na- regulates only certain types o crypto-assets on the market: (i) asset-reerenced
tokens; (ii) e-money tokens; (iii) other crypto-assets such as utility tokens.
ture o the execution may be conditioned upon certain variables, agreed 92
Cryptocurrency is the most well-known type o crypto-asset; in addition to
by the parties (e.g. the occurrence o particular events). Some o these
being used to trade products or services, cryptocurrencies can be a vehicle or
conditions are implemented directly on the blockchain, others o-chain. speculation (such as trading on a cryptocurrency trading platorm), or as a store
As or the ormer, consider the example o purchasing a blockchain- o value.
based bond, which involves a blockchain-native token that circulates 93
The counter-perormance (the payment) on the blockchain can be carried
through smart contracts. In such cases, it is straightorward to monitor out in dierent ways, all o which are currently being tested in the Eurozone by
the bond’s lie cycle within the blockchain and veriy the accuracy o the ESCB (European System o Central Banks) on DLT systems integrated with
automatic processes, such as changes in value and interest rates. How- Central Bank money. There are three main options that have been proposed,
ever, when the conditions or contract execution rely on o-chain respectively, by the Bank o Italy (TIPS hashlink), the Banque de France
(Central Bank Digital Currency), and the Deutsche Bank ("Trigger" solution).
Trials will be launched between May and September 2024 ollowing a call-or-
interest that will identiy and gather potential participants in the trial. These
solutions must enable interoperability between inrastructures that are
currently independent – both those that govern the exchange o digital assets
and those that provide settlement services in central bank money. The aim is, in
essence, to build a bridge between DLT and nancial market inrastructures.
The proposal rom the Bank o Italy is described in detail in paper no. 26 o
2022, Integration o DLTs with market inrastructures: analysis and proo o concept
or a secure DvP between TIPS and DLT platorms (available on the website o the
Bank o Italy).
20
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
developers to ensure the possibility o halting contractual execution o receipt o and in accordance with the Qualied Instructions, the De-
under specic conditions. This provision has sparked a heated debate positary shall return, in whole or in part, the Deposited Amount to the
among market operators and scholars. Some (e.g. Polygon) consider it Depositor:
not to be technology-neutral, as it would penalize public blockchains (i) who has exercised his/her right o reconsideration within [_][SG1]
compared to private ones. The adoption o contracts-on-chain in the days [Insert number o days] o signing the Contract, pursuant to Article
logical platorm model that we have proposed (supra, Section 5) makes [6.3] o the Investment Conditions]
public blockchains compliant with the rules imposed in the current The party/user will be able to exercise the right o withdrawal in a
version o the Proposal or a Data Act concerning ’data sharing’ and simple and direct way on the blockchain by selecting the specic button
’interruption’. Contracts-on-chain can already guarantee automatic provided by the logical platorm.
interruption – either upon the occurrence o on-chain events or due to
external intervention (e.g., an oracle) when the conditions occur o-
chain and the parties have so arranged. It is thereore a matter o I a party chooses to exercise the right o withdrawal, the smart
providing, alternatively, options or annulment by means o a ’reverse contract will perorm the ollowing verications: (i) it will conrm that
transaction’, a code re-writing (re-coding), or the exercise o a ’kill the withdrawal request is made within the stipulated time limit, and (ii)
unction’. The kill unction, in a specic environment, such as that o a it will ensure that the request is initiated by the depositor and not by any
logical platorm on a public blockchain, may play a residual role. other party.
For example, some scholars reer to the kill unction as a guarantee o Upon successul completion o these checks, the smart contract will
the exercise o the right o withdrawal in smart contracts. However, promptly and automatically reund the deposited amount to the
parties using contracts-on-chain can naturally exercise the right o depositor and notarize an on-chain timestamp to document this return.
withdrawal without the need to activate a kill unction; such a process is This marks the completion o the contract-on-chain operation. A
more straightorward. Below is an example illustrating the right to ex- comprehensive record o all transactions executed by the involved
ercise withdrawal within the escrow contract developed according to parties will stay on the blockchain, with access limited to the parties or
contracts-on-chain logic. individuals chosen by them, primarily or evidentiary purposes.
[For the duration o the Deposit Period, within 1 (one) Business Day
21
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
13. Modifcation o the contract contracting parties.
The European Data Act94 requires, among the conditions that a smart 14. Dispute resolution
contract must comply with, the possibilities o interruption, execution,
and modication. At rst glance, modication might seem ontologically An sotware or hardware oracle96 may have the task o resolving
incompatible with the inherent characteristics o smart contracts. Upon disputes.97 This unction can be perormed by a trusted third party98:
closer examination, it is not. In act, smart contracts involve recording alternatively, by the blockchain technology provider or by the operator
on the blockchain the intentions o the parties, the payment, or parts o o the logical platorm where contracts-on-chain are negotiated,
the agreement designed or automatic execution. The blockchain used is concluded, and executed, or even by external entities chosen by the
not static (and indeed must evolve continuously) and neither are the parties.99 Contracts-on-chain ensures the fexibility that parties require,
smart contracts that operate on it. Contracts-on-chain, which are con-
tracts that partly operate on the blockchain and that harness the char-
acteristics o smart contracts, can be subject to modications over time
96
according to the intent o the parties or any external conditions. What is An oracle is any mechanism that extracts data, inormation or expert
preserved on the blockchain is documentation o various contract ver- knowledge rom external sources and provides them to a ‘closed’ system, i.e. a
sions (the rst until the most recent), with the last version subject to system that has no access to these sources on its own (inbound oracle); or vice
changes by the parties in a way that resembles o-chain contractual versa, any mechanism that conveys data rom a closed system to the external
‘world’ (outbound oracle). Oracles can be used or transmitting inormation
practices. In this way, contracts on-chain merges the advantages oered
rom the o-chain world to the on-chain one or vice versa (data carried or
by public blockchains with responsiveness to the need or fexibility
automated oracles),and or perorming computation o-chain and subsequently
typical o legal contracts. At least until now, legal scholars have deemed transmit the outcome on-chain (computation oracles). See, among others: A.
these conficting needs hard to reconcile. BENIICHE, A study o blockchain oracles (2020) < https: //arxiv.org/pd/
For example, in the ace o an unexpected event that prompts the 2004.07140.pd> accessed 6 Aug 2024; V. PAPADOULI-V. PAPAKONSTANTINOU, A
parties to renegotiate the contract - a scenario that has gained increasing preliminary study on artifcial intelligence oracles and smart contracts: a legal
relevance in recent years, especially ollowing the nancial crises and approach to the interaction o two novel technological breakthroughs, Computer
the Covid-19 pandemic - contracts-on-chain can guarantee the ability to Law & Security Review, (2023), 105869.Sotware oracles can interact with any
revise certain clauses or sections o an on-chain contract. This can be sources o inormation available online, such as databases, servers, and web-
achieved either by stipulating renegotiation triggers within the smart sites, and convey data to the blockchain platorm in real time.Harware oracles
contract, by enabling the parties to invoke an oracle that communicates are usually installed in physical objects with electronic sensors, like robots, or
relates to objects with QR codes/barcodes; they interact with the physical world
the necessary actions to the smart contracts, or, in the case o super-
and convey the necessary inormation to the blockchain platorm, or vice versa.
vening and unoreseen events, by directly modiying the contract on the 97
See J. ESTCOURT, Smart Contracts and Dispute Resolution: Faster Horses or a
blockchain. Also, in cases where the parties cannot reach an agreement, New Car?, Smart Legal Contracts, (J. Allen and P. Hunn, Eds . Oxord University
they may resort to an oracle or assistance. Press) 2022, pp. 79 – 87,. p. 81: “Because globalisation and digitisation both, at
Parties involved in an on-chain contract could potentially delegate once, enable and require contracts to be negotiated and ormed over the
an oracle not only to report o-chain events on-chain95 but also to Internet, it is dicult to see how contracting parties will not look to online
determine perormance or address aspects not initially covered by the solutions or disputes arising rom their agreements. That is to say, that the age
has been reached when consumers o dispute resolution will be able to opt or a
system based on simplicity, eciency and economy, and may well be prepared
to do so, even at the cost o the loss o intimate involvement in a human
94
Regulation (EU) 2023/2854 o the European Parliament and o the Council managed process and the loss o the imprimatur o a state court". See also: F. AST
o 13 December 2023 on harmonised rules on air access to and use o data and – B. DEFFAINS, When Online Dispute Resolution Meets Blockchain: The Birth o
amending Regulation (EU) 2017/2394 and Directive (EU) 2020/1828 (Data Decentralized Justice, Stan. J. Blockchain L. & Pol’y, 2021, pp.241 , and R.
Act). KOULU, Blockchains and Online Dispute Resolution: Smart Contracts as an Alterna-
95
Specically, an oracle consists o a script that veries the existence o the tive to Enorcement (2016) 13 SCRIPTed 40.
98
necessary prerequisites or the realization o the planned consequence. The data M. DUROVIC-A. JANSEN Formation o Smart Contracts under Contract Law, in Di
that oracles transmit drives the execution o smart contracts and thus the Matteo, Cannarsa & Poncibo (ed.) Cam- bridge Handbook o Smart Contracts,
unctioning o the blockchain ecosystem. For this reason, some call them Blockchain Technology and Digital Platorms (Cambridge U Press, 2020), p. 66;
‘bridges’ between the real world and the blockchain protocols. See B. CARRON - A. STAZI, Smart Contracts and Comparative Law (Springer, 2021), p. 81.
99
V. BOTTERON, How smart can a contract be? , supra n. 23, dene oracles as “sensors Currently, Decentralized Dispute Resolution (DDR) projects are operating
in the physical word”. G. CARDARELLI, Beyond Oracles – A Critical Look at real- on the market that adopt solutions based on human oracles, which make it
world Blockchains, Future Internet, 2022, p. 175, also takes up the concept, possible to overcome (in part) the limitations o traditional dispute resolution
writing that "[o]racles act as a bridge that can digest external and non- systems by making use o: (i) the traceability and immutability characteristics
deterministic inormation into a ormat that a blockchain can understand"; o the blockchain; (ii) the sel-execution typical o smart contracts; (iii) the
similarly, B. Curran, What are Oracles? Smart Contracts, Chainlink & "The Oracle fexibility o the intervention o a human agent. However, in these experiments,
Problem," in medium.com, 2019.In the ELI Principles, an oracle is dened as a the ecient use o DDR is limited to medium/low value disputes, which do not
“service that updates a distributed ledger (e.g. a blockchain) using data rom require complex technical-legal investigation and which have as their object the
outside a distributed ledger system (outside the blockchain context). An oracle mere transer o sums o money. For a detailed analysis o how some o the
transmits inormation o-chain in computer language to the network”.This current DDRs work, see: Y. GABUTHY, Blockchain-Based Dispute Resolution: Insights
mechanism may raise critical issues with reerence to: (i) the reliability o the and Challenge, Games, 2023, pp. 14 ., available on https://doi.org/10.3390/
inormation collected by the oracle; (ii) the presence o tools capable o g14030034. For a more detailed analysis on the role o blockchain technology
translating technical concepts that are dicult or the program to understand with respect to traditional justice, see: P ORTOLANI, The Judicialisation o the
(translation rom natural language to programming language); (iv) the juris- Blockchain, available on https://papers.ssrn.com/sol3/papers.cm?abstract_
diction in the blockchain context, which is characterized by territoriality in the id=3230880, 2018, pp. 1-39, esp. pp. 30-31, according to whom, “On the one
absence o a specic reerence system. For an in-depth analysis o these issues, hand, online dispute resolution based on blockchain technologies seems to be a
reer to P. MICHAELSON, S. JESKIE, Where the Disputes Lie: When Blockchain Tech- growing reality, meeting a demand o adjudication that cannot be satised by
nology Will Need Help Sorting Out Its Contracts, 2021, available in: https://pa- state courts due to the excessive costs o litigation. On the other hand, however,
pers.ssrn.com/sol3/papers.cm? abstract_id=3893223 and Z. LOW, Execution o traditional avenues o court litigation could become more attractive or users
judgments on the Blockchain: A Practical Legal Commentary, 2021, available at: where blockchain technologies become relevant on a wide scale or high-value
https://jolt.law.harvard.edu/digest/execution-o-judgements-on-the-block- transactions. In light o this, claims that blockchains are radically disrupting the
chain-a-practical-legal-commentary. way justice is administered by courts are excessive”.
22
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
depending on the circumstances, and also enables dispute resolution perormance o a mediation or conciliation unction,102 to the speci-
through on-chain tools that can be partially automated (e.g., when the cation o an arbitration award.103 In these cases, the parties may also
oracle is constituted by one or more arbitrators) or even ully automated choose the databases that the oracle must access to acquire the inor-
(e.g., when the oracle is an algorithm applied to one or more databases mation necessary to issue the award. As this additional unction becomes
previously indicated by the parties). more widespread, it becomes more likely that – in the uture – smart
Contracts-on-chain may contain a clause concerning dispute settle- contracts will, in conjunction with articial intelligence, automate the
ment100 that entrusts an oracle chosen by the parties with tasks that can oracle unction through algorithms, while still adhering to the rules o
range rom the simple prediction o the outcome o a dispute,101 to the European Union that require human control (human in the loop) or
the use o articial intelligence.104 When integrated within a logical
platorm, the on-chain contract may include a dispute resolution clause
that assigns judicial authority (i provided) to the platorm or to an
entity designated by it, or it may reer disputes to an arbitral tribunal or
a judge (o-chain). Similarly, the contract can speciy an applicable law
100
Reerence is made to a classic contractual dispute settlement clause. Ac- that can be applied by the platorm itsel, by the oracle, by the arbitral
cording to D. ALLEN - A. LANE - M. POBLET, The Governance o Blockchain Dispute tribunal, or by the judge, based on the choice o the parties rom various
Resolution, Harv. Negot. L. Rev. 2019, pp. 75, : “Contracting parties ace a available options.
broader governance choice: what is the best institutional governance mecha- This eature, oered by the logical platorm, addresses the practical
nism to resolve contractual disputes? The ways to govern a contract—that is, to
issue o establishing a connection between the contract and a legal
minimize the costs o contracting and acilitating the exchange—range rom
system, which, as previously mentioned, does not constitute an essential
courts to arbitration”.
101
Depending on the technical characteristics o the underlying blockchain
reerence or smart legal contracts but becomes central to the contracts-
technology, smart contracts can provide dierent solutions or dispute settle- on-chain model. This matter gains signicance when considering the
ments. It will be up to the parties to represent the one chosen by mutual current trend in the Web2 environment, where digital platorms have
agreement in the contract. The use o one or the other solution is let to the established private legal orders – eaturing contracts between the plat-
parties based on the criterion o convenience, with regard or the characteristics orm and users – that interact with state legal systems and sometimes
o the contract. The issue has been widely discussed by legal scholars, who derogate rom their rules.
propose two dierent approaches to dispute resolution or smart contracts. It is worth looking again at the example o an escrow contract.
According to a rst approach, smart contracts, operating within the existing Formulating this agreement according to the contracts on chain model
regulatory ramework on contracts, can be evaluated by judges or arbitrators by empowers users to review on the blockchain, at any time, the dispute
applying existing procedures (including ADR). What is necessary is to import
resolution conditions and methods relevant to execution. For instance,
(on-chain) traditional contractual principles. In this sense, see: G. GOVERNATORI -
consider the ollowing clauses:
G. IDELBERGER - F. MILOSEVIC - Z. RIVERET - R. SARTOR - G. XU, On legal contracts,
imperative and declarative smart contracts, and blockchain systems, Articial In- It is understood that the Depositary will rerain rom any subsequent
telligence Law 2018, pp. 377-409; M. SOKOLOV, Smart Legal Contract as a Future o payment i the Depositary receives one or more objections or opposi-
Contracts Enorcement, Working paper, 2018, available on SSRN: <https://ssrn. tions to the execution o the payment, notarized on-chain, as made by
com/abstract=3208292>; A. HOLDEN - A. MALANI, Can Blockchains Solve the
Holdup Problem with Contracts? Working Paper No. 2018-12, University o
Chicago. The second approach considers smart contracts as legal instruments
102
distinct rom traditional contracts. It ollows that the rules existing in various It is reasonable to orecast a development o this unction by an oracle
legislation, in both the common law and civil law realms, would not allow or a directly on chain in the insurance sector. The insurance company would insert
resolution o disputes that had arisen rom the use o smart contracts. In this on-chain settlement proposals which would simultaneously initiate a procedure
case, the scholarly proposals go in the direction o promoting a “distributed allowing the parties to resolve the claim by mutual agreement.. I the parties
jurisdiction”, a dispute settlement governance based on the blockchain. See: W. reach an agreement, their choice automatically migrates onto the blockchain
KAAL – C. CALCATERRA, Crypto Transaction Dispute Resolution, Business Lawyer, and is no longer contestable. Absent any agreement between the parties, and
2017, pp. 109-153. Some scholars believe that both approaches have limita- where the maximum number o attempts provided or by the platorm has been
tions and advantages and that a coherent system should be conceived, one reached, the system would automatically initiate the litigation procedure.
103
capable o containing all possible manners o resolving disputes. See D. Allen - This is called a "sotware oracle". Oracles, in act, can be classied dier-
A. LANE - A. POBLET, The Governance o Blockchain Dispute Resolution, Harv. Negot. ently on the basis o the source o the data they use: (i) a "sotware oracle",
L. Rev., 2019, pp. 75 .. According to these authors, blockchain-based dispute when the data comes rom online sources or when it comes rom digital in-
resolution systems might not only service the blockchain industry and smart ormation in general; (ii) a "hardware oracle", when the data transmitted by the
contracts, but also extend into servicing dispute resolution or traditional legal oracle originates rom the physical world; (iii) "human oracles", when the data
contracts. Contracting parties in a more conventional contract might determine entered into the blockchain has previously undergone evaluation or interpre-
that some blockchain-based orm o dispute resolution economizes the costs o tation. A smart contract may include an arbitration clause by which the parties
dictatorship and disorder. See also B. HOWELL - P. POTGIETER, Uncertainty and entrust a third-party arbitrator with the dispute settlement. The external in-
dispute resolution or blockchain and smart contract institutions, Journal o Insti- ormation retrieved by the oracle (hardware oracle) would thereore consist o
tutional Economics, 2021, pp. 545–559, spec. p. 547: "or eciency-raising the arbitration award, and the logic o the smart contract would guarantee the
objectives to be attained, a role will continue to exist or traditional contract execution o what is established therein. In this regard, see Fr. ORTOLANI, The
governance institutions (notably contract law and the courts) as complements impact o blockchain technologies and smart contracts on dispute resolution: arbi-
to blockchain governance arrangements". According to some, however, the use tration and court litigation at the crossroads, in Uni. L. Rev., 2019, pp. 430 – 448,
o external courts and arbitrators is the only viable way to terminate contractual spec. pp. 437 – 442, according to whom, the possibility or parties to encode
agreements that do not take place as originally planned by the parties. Courts their contracts into script extends beyond the rather narrow limits originally
and arbitrators have the possibility to apply principles and use evidence imposed by the bitcoin protocol, and, thus, new prospects or ecient arbitral
relating to subsequent phases with respect to the time o conclusion o the procedures arise.
104
contract, without limiting themselves to the use o processes based on pre- On July 2024 the European Union’s Articial Intelligence Act, Regulation
scriptive rules. See also B. HOWELL - P. POTGIETER, 551–554: "An ex post (EU) 2024/1689 ("EU AI Act") was published. According to V. PAPADOULI-V.
principles-based court or other adjudication and arbitration process (e.g. PAPAKONSTANTINOU, (note 96), the interconnection between smart contracts and
alternative dispute resolution processes) taking account o unanticipated articial intelligence takes place through oracles, which can be, among others,
changes that occur ater a contract is agreed appears to be diametrically highly sophisticated articial intelligence systems (autonomous systems). The
opposed to rules-based smart contracting where it is presumed that all possible A. also indicate the appropriate legal directions in case o articial intelligence
contingencies can be anticipated ex ante and programmed into code, and be oracles’ ailures, based on the most prevalent current approaches to AI’s (the
enacted without a change in the uture". user’s) contractual and/or non-contractual liability.
23
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
the Depositor or the Beneciary individually or jointly by the Principals. that the arbitration decision cannot be appealed. The Arbitration Board shall
The Deposited Amount will remain deposited in the Deposit Account, also decide on the basis o the loser-pay principle, with regard to the costs o
which will subsequently be released only and exclusively upon the joint litigation, without prejudice to the right to compensate them.
indication o the Depositor and the Beneciary]. 10.4. The arbitration shall be based in Milan and shall be conducted in the
1. GOVERNING LAW AND DISPUTES Italian language.
10.1. The Agreement is governed by Italian law. 10.5. Without prejudice to the oregoing, it is agreed that any judicial
10.2. Any dispute arising rom the Agreement, or rom any agreements proceedings not alling within the jurisdiction o the Arbitration Board, in any
enclosing, amending and/or supplementing the Agreement, shall be submitted case relating to this Agreement, will all under the exclusive jurisdiction o the
to an arbitration panel composed o three arbitrators (the "Arbitration Court o Biella.]
Board"), one o whom shall act as Chairman, appointed by the Parties in I the contract so provides, the contracts-on-chain platorm will oer
accordance with the National Arbitration Rules o the National and Inter- the user the possibility o selecting the "initiate a dispute" button to reer
national Arbitration Chamber o Milan, which the Parties declare to be aware a dispute to an external o-chain party.
o and accept in ull.
10.3. The arbitrators will proceed in accordance with the law and will
decide by applying Italian substantive law; thereore, the decision o the ar-
bitrators shall be a judgment between the Parties. The Parties expressly agree
24
F. Bassan and M. Rabitti Computer Law & Security Review: The International Journal of Technology Law and Practice 55 (2024) 106035
15. Conclusion mechanisms can be executed ully or partially on the blockchain,
depending on the desired level o autonomy assigned to articial intel-
The contracts-on-chain model introduces a negotiation process that ligence. Sixthly, the issue o jurisdiction can also be addressed within the
enhances traditional contracts in several signicant regards. blockchain. This is made possible by the specic environment (i.e. the
We have veried the operation o contracts-on-chain in a specic logical platorm), as it is one in which contracts-on-chain operate
environment which we consider ideal or maximizing its potential: especially eectively on public blockchains
Thus, it is evident that contracts-on-chain possess distinct charac-
(a) as inrastructure, we utilized a third-generation public block- teristics when compared to smart legal contracts. It can also be observed
chain characterized by decentralized consensus, based on pure that the new issues raised by contracts-on-chain and the way they
proo o stake, reduced transaction costs, scalability, high secu- resolve old ones are topics warranting urther exploration by academics.
rity, and allowance or the modication o smart contracts; It is apparent, thereore, that contracts-on-chain can substantially
(b) a logic platorm serves as the superstructure o the blockchain, address many o the questions that legal scholars have raised in recent
the advantages o which signicantly mitigate the risks and years regarding the nature and unction o smart legal contracts. Unlike
limitations o public blockchain: it ensures prior identication o the smart contracts and smart legal contracts previously scrutinized by
parties (whitelisting) and linkage between dierent logical plat- scholars, contracts-on-chain are not mere execution mechanisms or
orms, enabling what we term ’distributed nance’. contracts established elsewhere, nor do they simply represent the phase
o contract stipulation on the blockchain. By means o the contracts-on-
The content o the contract recorded on the blockchain is expressed chain process, contracts are enhanced by the blockchain and are eec-
in natural language, thereby resolving the issue o translation. Machine tively transormed into ‘supercontracts’.
language, typically used in programming, is conned to sel-executing The latest generation o public blockchain enables the denitive
components. The certication o these sel-executing elements can be identication o parties in a certain and permanent manner; it records
assured by complying with standards dened by regulatory authorities and preserves negotiations; it eatures the automatic execution o con-
or on-chain contract applications in regulated markets or through third- tract clauses (including payments) upon predened conditions; it in-
party certication. terlinks and immutably records multiple contracts; it records parties’
We consider contracts-on-chain as a ’bridge’ tool between Web2 and certied signatures using established methods or new ones native to
Web3 because it allows or a modular use o the blockchain, ranging blockchains; and it employs a dispute resolution mechanism based on
rom minimum to maximum use, depending on the type o contract and the parties’ agreed-upon legal choices.
the parties’ intentions. Indeed, parties can make minimal use o the A logical platorm integrated into the blockchain aligns the ecosys-
blockchain, or example, by utilizing it solely or timestamping – to tems in which parties operate especially closely with the regulatory
notarize activities during the pre-contractual, contractual, and post- model that is still adopted by European supervisory authorities partic-
contractual phases – or they can make maximum use, utilizing all the ularly in the banking, insurance, and nancial sectors. This ensures an
tools that the blockchain oers to negotiate, conclude, and execute the adequate level o protection without compromising certain aspects o
contract. Between these two extremes, there are various partial uses o enhanced eciency, security, and decentralization that are inherent in
the blockchain, useul or notarizing the completion o one or more public blockchain.
activities. Due to this modularity in the use o the blockchain, based on
the parties’ choice, contracts-on-chain signicantly reduces the issue o Declaration o competing interest
contract infexibility on the blockchain.
Contracts-on-chain permits the verication o the negotiation phase, The authors declare the ollowing nancial interests/personal re-
ex post. The blockchain captures not only the content o the contract but lationships which may be considered as potential competing interests:
also the entire ormation process. Fabio Bassan reports administrative support was provided by Roma
The expression o consent is also securely recorded by the block- Tre University. Fabio Bassan reports a relationship with Roma Tre
chain, thanks to integration with existing digital signature tools, University that includes: employment. Fabio Bassan has patent pending
including advanced options, or through new-to-blockchain native to No NO I there are other authors, they declare that they have no
identication tools. Furthermore, contracts can be interconnected and known competing nancial interests or personal relationships that could
executed in a coordinated manner, all within the blockchain environ- have appeared to infuence the work reported in this paper.
ment. Fourthly, the sel-executing part o the contract operates accord-
ing to the automation mechanisms o the public blockchain, unctioning Data availability
entirely independently when events are on-chain and only partially
independently when conditions are o-chain. Fithly, dispute resolution The authors do not have permission to share data.
25
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