Q&A: Glimpsing the Potential of Blockchain-Based Contracts

We’ve only glimpsed the potential business and societal applications of blockchain.

Though some of blockchain’s most wide-spread implementations have yet to get regulators and the general public on board, enthusiasts of this technology won’t give up on its promises. Innovative applications keep popping up, heralding disruption in any ecosystem in which they threaten to land.

One of the most interesting developments in blockchain are smart contracts: agreements laid down in the form of code, stored in the blockchain and executed once specific conditions are met (if “X”, then “Y”). Their promise of transparency and automated execution has opened the door for alternative organizational models, with decentralized autonomous organizations (DAOs) emerging as a popular option. For businesses, DAOs represent a different choice to the traditional organizational model, in which decisions flow from board members on top. 

To have a better understanding of the business benefits, pitfalls and potential of smart contracts and DAOs, NSAM spoke with IT lawyer and academic Brian Sanya Mondoh. As founder of legal firm BlockchainLex, Mondohis well versed on the intersection of law and blockchain technology, as well as an enthusiast of smart contracts and the blockchain in general.

In the following interview, Mondoh explains the benefits of DAOs and smart contracts, as well as some of the shortcomings and challenges the technology faces in an age of low trust and lightning-fast technological advancement.

NSAM: Blockchain remains promising, but implementations of the technology –such as cryptocurrencies– have yet to gain the public’s trust. Do you see lack of trust, exacerbated by the FTX scandal and other bombshells, hampering the adoption of DAOs?

Brian Mondoh: The issue of trust is subjective. Scandals like FTX and hacks on various bridges might suggest a decline in consumer trust. However, taking an objective look at the performance of leading DeFi [decentralized finance] platforms indicates a steady growth in that area. 

Brian Mondoh will present at the CrossConnect Forum, next week in London. To register, visit crossconnectforum.com

Given the nascent nature of DAOs and the uncertainties of their legal treatment in many jurisdictions, only time will tell how these decentralized organizations will be regulated and defined, and ultimately their success. The development and testing of their vulnerabilities will greatly assist in how computational law and other emergent technology communities define, adopt and interact with DAOs.

NSAM: One of the issues preventing cryptocurrency from attaining a wider adoption is the lack of proper regulation. Wouldn’t DAOs face the same problem, and even more so considering that they aim to allow for stricter governance?

Brian Mondoh: Regulation that is at par with innovation is certainly important. A drawback is that DAOs are currently unconsidered substantively at law, with no consistent recognised legal status in the UK as in other common law or civil law jurisdictions, which troubles regulators and policymakers because it is not clear who bears legal rights and responsibilities. 

If courts or legislators were to construe DAOs as general partnerships, its participants are likely to owe each other fiduciary duties as partners who may be held jointly and severally liable in the event legal proceedings are brought against the DAO. As it is, the implied relationship between DAO members is not that of a fiduciary, but rather that participants stand on equal footing. Therefore, no member of a DAO owes a fiduciary duty to the organization or any other member. 

In any event, liability will not be imposed on DAO participants unless individual members undertake to act for or on behalf of another in circumstances, which give rise to a relationship of trust and confidence.

NSAM: How can businesses make use of smart contracts and DAOs? 

Brian Mondoh: Likened to a “digital co-operative”, a DAO’s participant maintains direct real-time control of contributed funds and the DAO’s governance rules are formalized, automated and enforced using smart contract code. A smart contract, i.e. a self- executing code on a blockchain, executes business logic when predetermined conditions are met, i.e “if “X” occurs, then execute step “Y” (Szabo, 1994). 

Smart contracts are designed to execute and monitor contractual conditions (such as payment terms and enforcement of legal agreements amongst other things). Arguably, smart contracts could lower various transactional costs and losses, minimize malicious and accidental occurrences and also diminish the need for trusted intermediaries and centralized institutions such as central banks and reserves.

NSAM: Understanding smart contracts requires, at the very least, familiarity with the technical aspects of blockchain technology. Could that requirement lead to a) opacity in the drafting and implementation of these contracts; or b) a slower adoption of the technology due to a lack of expertise among organizations/territories? Also, wouldn’t that make traditional contracts and organizational structures more attractive?

Brian Mondoh: The implementation of blockchain and smart contracts is subject to an organization’s business strategy. No organization is the same, and the complexity of their processes varies. 

Blockchain could enhance overall trust in public transactions and protect institutions from fraud by enhancing data transparency and integrity, create a seamless flow of data amongst validated users and enhance overall business processes. Smart contracts deployed on a blockchain could further the principle of trust and integrity in transactions by coordinating human activity, but are not dependent on human decision-making to technically operate.

Blockchain and smart contracts cannot solve everything. However, they coordinate information and trust in innovative ways

For automation to function as intended, parties have to consider two assumptions: first, that the smart contracts will operate as expected; and second, that network participants will agree to be bound by the outcome of those smart contracts. Due to bugs or code errors, smart contracts may be flawed, behave in unexpected ways or fail to execute when expected. At times they may be faced with commercial scenarios so complex and unpredictable that the code fails to embed all possible answers to all possible questions. 

Factually, blockchain and smart contracts cannot solve everything. However, they coordinate information and trust in innovative ways. Therefore, understanding what the technology can and cannot do is critical to not only tackle current problems in legacy systems, but also to consider future opportunities for applying this technology.

NSAM: Finally, on a personal level, you have developed a pretty serious commitment to blockchain and smart contracts. What is the source of this motivation?

Brian Mondoh: Traditionally, lawyers have been taught to see law from a “black letter” and “law in context” view. Therefore, there has been a conception of law as autonomous, with rigid boundaries between law and other disciplines. My motivation is to bridge the gap in understanding the interaction between law and fast paced technological innovations by applying my academic and technical knowledge from both disciplines. The clarity of my approach ensures that I provide sound advice and produce high quality work, which will have lasting interest and value.