In this video, we'll explore the relationship between smart contracts and traditional legal systems. If we're talking to a lawyer, the most accurate way to describe a smart contract is as a set of security protocols taking on the burden of lawsuit. You know what a repo man is? Repo is short for repossession. Banks and finance companies hire repo men to repossess cars and other assets when whoever bought the asset on credit defaults on a loan. Usually, they just stop making payments. So, let's imagine a repo man comes and takes your car. Now, the burden of a lawsuit shifts from the creditor, your bank, over to you, the debtor. Going to court to enforce or dispute a purchase contract is expensive and someone has to bear the cost. A repo man places the burden on the person with the largest obligation. The responsibility usually rests on the party most likely to breach. By removing the burden of lawsuit from the creditor, lenders will have a lower cost of lending. That means they'll be able to offer lower rates and provide more loans. A smart contract like a repo man adds a layer of security. This layer can match the rights and requirements expected from a relationship with concrete action. Running on a public blockchain, smart contracts can control assets jointly with authorized addresses namely, public key pairs controlled by users. If, as they say possession is nine tenths of the law, then across border blockchain based financial smart contract maybe 99 percent of the law. In other words, smart contracts may reduce the need to seek remedy with traditional law. But the question still remains, will smart contracts hold up in court? A smart contract generally makes no attempt to be legally binding. It's called a smart contract because it mimics or improves upon the effects of a traditional legal contract. It provides incentives for performance, not by threatening litigation but by using software to control money and other assets. If the smart contract can't take into account all probable factors and the risk of a lawsuit, then a traditional contract may also be needed. In such cases, it's risky to expect the parties, lawyers, judges, and jurors to interpret the dry code. That is, to decipher the lines of software code. They'll need to look at the wet code like the user interface and the traditional legal texts that lawyers use. We may need to supplement our dry code with wet code evolved from lawyers of the jurisdiction. The cost will be high but then again, so is the risk without it. This begs another question, how much of a traditional contract do we still need, and what are the costs of enforcing it? On one hand smart contracts make some cross-border relationships between small businesses and individuals possible by reducing the reliance on complex and outdated methods. On the flip side, what if the execution of the smart contract penalizes one party too harshly? Most likely, it'll take the traditional system to fix the problem, and that could be costly. We stated earlier in this module that wet code and dry code are complimentary. So, we may want to supplement traditional contracts with smart contracts. Both parties have the option to roll back undesired, unexpected outcomes. Although smart contracts in traditional contracts were best in tandem, there are some smart contract programming options available to deal with contract breaches. One is performance verification code. It detects a failure in execution. It will seize the on chain collateral of whoever breached the contract as payment for damages. If the outcome is unsatisfactory for both parties, then they can rewind some of their transactions through the multi-sig rewind we discussed in a prior session. The parties unanimously agree to undo a payment or pay compensation with a separate additional money transfer. The really tricky part comes with the matter of jurisdiction. Smart contracts are not regulatory technology, also known as Regtech. Smart contracts are global and persist on a globally distributed blockchain. They're specific to the dry code as programmed by their original coders. They control assets and verify performance obligations. So, they manage the burden of lawsuit. Regtech is about checking whether human beings are complying with laws and regulations in certain areas. Regtech is only a simulation of how wet code may be enforced by a court. Drop up, we ask this final question, what if all our computers could check our contracts to see whether they're compliant? That's essentially what Regtech attempts to do. Some people have called these compliance checkers smart contracts, but that's not accurate. Smart contracts deal with assets. They don't have knowledge of all of the world's legal systems. Regtech focuses on the application of wet code. These two forms of technology are clearly different at this stage in the evolution of blockchain technology. If you've got questions or comments about these ideas, please, post them on the discussion form. Up next, we explore the various application areas of smart contracts.
