SMART CONTRACT – ACHIEVEMENT OF BLOCKCHAIN APPLICATION, LOOPHOLES AND RECOMMENDATION FOR VIETNAM

Viết thuê luận á, luận văn thạc sĩ, chuyên đề ,khóa luận, báo cáo thực tập
Sdt/zalo 0967538 624/ 0886 091 915 lamluanvan.net
MINISTRY OF EDUCATION AND
TRAINING FOREIGN TRADE UNIVERSITY
MASTER THESIS
SMART CONTRACT – ACHIEVEMENT OF
BLOCKCHAIN APPLICATION, LOOPHOLES
AND RECOMMENDATION FOR VIETNAM
Specialization: Master of International Trade Law and Policy
HO MINH KHUE
Hanoi - 2020
MINISTRY OF EDUCATION AND

TRAINING FOREIGN TRADE UNIVERSITY
MASTER THESIS
SMART CONTRACT – ACHIEVEMENT OF
BLOCKCHAIN APPLICATION, LOOPHOLES
AND RECOMMENDATION FOR VIETNAM
Major: International economics
Specialization: Master of International Trade Law and
Policy Code: 8310106
Full name: Ho Minh Khue
Supervisor: Dr. Nguyen Ngoc Ha
Hanoi- 2020
i
STATEMENT OF ORIGINAL AUTHORSHIP

I, Ho Minh Khue, confirm that this Master thesis has been written solely by the
undersigned and contains the work of no other person or people except where explicitly
identified to the contrary.
I also state that said Master thesis has not been submitted elsewhere for the
fulfillment of any other qualification.
I make this statement in full knowledge of and understanding that, should it be
found to be false, I will not receive a grade and many face disciplinary proceedings.
Signature:
Date: 23rd
March 2020
ii
ACKNOWLEDGEMENTS
I would like to express my special thanks of gratitude to my supervisor Dr.
Nguyen Ngoc Ha as well as our principal, Faculty of Graduate Studies and all
professors of Foreign Trade University who game the golden opportunity to do this
wonderful projects on the topic “Smart contract – Achievement of Blockchain
application, loopholes and recommendation for Vietnam”, which also helped me in
doing a lot of research and I came to know about so many new things I am really
thankful to them.
Secondly, I would also like to thank my parents and friends who helped me a lot
in finalizing this project within the limited time frame.
iii
CONTENTS
STATEMENT OF ORIGINAL AUTHORSHIP ................................................... i
ACKNOWLEDGEMENTS..................................................................................... ii
LIST OF ABBREVIATIONS................................................................................. iv
LIST OF TABLE SUMMARY OF THESIS RESEARCH RESULTS................v
INTRODUCTION.....................................................................................................1
CHAPTER 1: UNDERSTANDING OF BLOCKCHAIN APPLICATION AND
SMART CONTRACTS ............................................................................................6
1.1. Definition of Blockchain and how it works..................................................6 1.1.1.

History, definition and types of Blockchain ............................................6 1.1.2.
Development of Blockchain recently .....................................................13 1.2.
Fundamental of Smart contracts ................................................................16 1.2.1.
Definition, characteristics and mechanisms of Smart contract............16 1.2.2. Benefit
and potential application of Smart contract in realistic...........23 1.2.3. Overview about
challenges of Smart contracts......................................32 1.3. Detailed challenges
.......................................................................................33 CHAPTER 2: SITUATIONS
OF SMART CONTRACTS WITHIN CURRENT
FRAMEWORKS................................................................................36 2.1. Overview
framework and policy of Smart contract in some countries...36 2.1.1. Current legal
frameworks in some countries ........................................39 2.1.2. Evaluation
...............................................................................................48 2.2. Problematic aspects
that arise with Smart contracts................................49 2.2.1. Technically difficulty
posed by smart contract development ................49 2.2.2. Smart contracts and contract
law...........................................................50 CHAPTER 3: RECOMMENDATION
FOR VIETNAM ...................................64 3.1. Actual situation of Blockchain
application in Vietnam ............................64 3.2. Contracts and Smart contracts
regulation in Vietnam.............................67 3.3. Lessons from framework and policy
of Smart contracts for Vietnam....71 3.3.1. Principles for the Blockchain Act
..........................................................73 3.3.2. Issues relate to the law and blockchain
.................................................84 3.3.2. Issues relate to smart legal
contracts.....................................................86
CONCLUSION........................................................................................................89
LIST OF REFERENCES .......................................................................................91
iv
LIST OF ABBREVIATIONS
No Abbreviation Description
1 IoT Internet of Things
2 P2P Peer to Peer
3 TCP Transmission Control Protocol
4 PoW Proof of Work

5 DLT Distributed ledger technology
6 PGP Pretty Good Privacy
7 ICO Initial Coin Offering
8 ID Identification
9 DAO Decentralized organizations
10 dApp Decentralized applications
11 GDPR General Data Protection Regulation
v
LIST OF TABLE
Table 1.1: Public Permissionless and Private permitted Blockchain..........................9
Table 1.2: Traditional and smart contracts................................................................23
Chart 1.1: How smart contracts work .......................................................................19
vi
SUMMARY OF THESIS RESEARCH RESULTS
The birth of "smart contracts" have based on developments in the emerging field
of Blockchain application: computerized transaction protocols which autonomously
execute the terms of a contract. With a lot of advantages which I will analyze below,

Smart contracts are really offering the promise of increased commercial efficiency,
lower transaction and legal costs, and anonymous transacting.
However, beside of benefits they bring into, there are equally significant concerns
that smart contracts will encounter considerable difficulty adapting to current legal
frameworks regulating contracts across jurisdictions. This thesis hopes considers the
potential issues, loopholes within legal and practical enforceability that arise from the
use of smart contracts and gives recommendation for Vietnam.
1
INTRODUCTION
1. Importance of the study
Blockchain application has been popular, adopted and growing rapidly both in
academia and industry. This growth is driven by the unique features of Blockchains:
providing reliability, integrity, and auditability in a decentralized system. Thanks to
advantages of Blockchain techonology, such as possible event
driven, self-executing code statements, smart contracts were born. These contracts
autonomously execute prespecified tasks, such as settling a contract, by examining
changing environmental conditions in conjunction with the contract‘s embedded rules.
Smart contracts are envisioned to have a range of innovative applications, such as
privacy preserving transactive energy systems, asset tracking in the IoT, and various
financial applications. Unfortunately, due to the peculiarities of smart contract
platforms and languages, the development of smart contracts has proven to be a
challenging and error-prone process. These errors often manifest as security
vulnerabilities, which have led to multiple notable security incidents, with losses in
therange of hundreds of millions of dollars worth of cryptocurrencies.
Specially, framework and policy about smart contracts in countries is
uncompleted. Although this is not a priori bad nor cause for concern cause technology
has always driven societal change, and the law has a long history and plenty of
experience adapting to such change, at the same time, history shows us that technology
must also be open to adapt to existing law where the law reflects the values and
consensus of society, weakness of them will bring some disadvantages to many people
using.
In this study, I investigated Blockchain technology and smart contracts,
particularly the legal implications of smart contracts. I would like to enhance the

understanding of smart contracts by providing an overview of legal issues to smart
contracts and some points of my view to recommendations to Vietnam for the 4.0
technology period.
2
2. Literature review
Blockchain and smart contracts have the potential to disrupt several business
domains, ranging from supply chain and healthcare to finance and accounting. Similar
to the status of the internet about two to three decades ago, there is currently
tremendous excitement over the potential of Blockchain and smart contracts. However,
this is a pretty new session, particularly in Vietnam, there is not anything of acts or
regulations or researches about them. News or information of them is also limited,
there is just a article named "Negotiation with code - uncompleted legal issues" on 6th
April, 2018 of Civil and Network by Ms. Dieu Thao Vu Thi.
The fields of application of smart contracts are numerous. They can be used, at
least in theory, wherever economic assets show interfaces to the internet and certain
events can be verified digitally. Thanks to the increasing IoT, this affects more and
more areas. In addition to the financial and insurance sectors, which have been
particularly present up to now, smart contracts are suitable for use in areas such as
Sharing Economy, Energy, Supply Chain or Identity Control. Naturally, contracts that
deal with access to digital content, and are therefore easily translatable into software,
are predestined for smart contracts. A noteworthy example is the distribution of music
via Blockchain-based smart contracts. Recognizing of importance of Blockchain and
smart contracts, there are some researches in these fields, special in legislation: With
smart contracts the drafting stage of the contract ex ante, leading to an automatic
execution, will become more important than subsequent law enforcement ex post. The
development of this new contract concept requires a modification of the applicable
contract law is a big question. The answer to that depends mainly on how this new way
of contracting is accommodated by existing legal provisions.
I can list some researches related to issues, which are:
- Cardozo Blockchain Project, Smart Contracts & Legal Enforceability (2018)
accessed 22 January 2018.
3

- Riccardo de Caria, A Digital Revolution in International Trade, The
International Legal Framework for Blockchain Technologies, Virtual Currencies and
Smart Contracts: Challenges and Opportunity.
- Alexander Savelyev, Contract law 2.0: "smart" contracts as the beginning of
the end of classic contract law...
With collection many articles and researches of foreign authors in this field, I
would like to send general view and recommend personal ideas in Blockchain
application and smart contracts, particularly in smart contracts legal making in
Vietnam. The results of this study will enhance the understanding of Blockchain and
smart contracts, and help other organizations in Vietnam adopting the technology do so
successfully.
3. Objectives
This study contributes the concept of smart contracts by considering the legal
issues that do or may arise from their use. It begins by briefly introducing the reader to
the paper outlines peculiarities of Blockchain technology and which forms the core of
Smart contracts, focus on main characteristic features of Smart contracts are described.
Besides, the paper outlines key tensions between recent laws, particular contract law in
connection with Smart contracts to show off legal challenges or loopholes. It then
proceeds to examine in detail the principal legal issues arising from the use of smart
contracts, focussing upon actual and potential conflicts with established principles of
contract law. Finally, concludes by cautiously welcoming the dawn of smart contracts
but foretelling of potential difficulties that lie ahead for commercial parties and
lawmakers in Vietnam.
4. Scope
In the context of technology revolution today, this potentially breakthrough
technology also implies a legal revolution: do blockchain technologies, and smart
contracts require new legal avenues to be developed. However there are many
questions claimed, are recent laws of Smart contracts in many countries and provisions
of some organizations from over the world sufficient? And, how are and should they be
regulated to be trick with quickly development of technology? A
4
specific object of inquiry in this regard is the role of Uncitral and its potentially crucial
contribution it can provide to the creation of a worldwide legal environment that is

suitable for the development of blockchain-based applications, contracts, businesses,
and so forth.the issue of resolving trade disputes arising between countries has always
been recognized as complex. The thesis could not address all the issues, but focuses on
the following contents: Theoretical basically issues of understanding about Blockchain
and Smart contracts; the current law in some countries about smart contracts and form
that voice challenges and loopholes of law regulated Smart contracts; recommendations
for Vietnam to improve law and policies about Blockchain and Smart contracts.
5. Research questions
Research Questions: In this study, I aim to answer the following research
questions.
•RQ1: What are the main legal issues in smart contract related discussions?
•RQ2: What are the characteristics about smart contracts of legal developers in some
countries?
•RQ3: What lessons for Vietnam from legislation of developing countries about
smart contracts?
6. Methodology
First, I perform standard statistical analysis on the posts that i collected from
books, articles and discussions on the Internet. I consider the tag distribution of these
posts to find the tags that are most frequently mentioned in smart contract posts. These
tags help us to identify the most popular topics among smart contract developers. It is
necessary to look at the actual textual content of the posts to discover the main
discussion topics.
The second step of my studies statistics of smart contract discussions to
understand of smart contracts. I consider the number of posts related to smart contracts
found on the Internet and some on libraries and the ratio of answered and unanswered
questions, consists of data preprocessing to prepare the study.
5
Besides, the topic is studied on dialectical materialist perspective, combined with
methods of statistical analysis, synthesis methods, comparisons, historical methods and
developmental methods.
The thesis is also carried out from the point of view of the State of the Socialist
Republic of Vietnam through guidelines and policies on economic integration and
development in the new era. The thesis is presented by the method of analysis,

interpretation and inductive combined with comparative and statistical methods.
7. Structure of the thesis
In addition to the introduction and conclusion and lists of references, abbreviations,
etc, this thesis is divided into three chapters as follows:
(1) Understanding of Blockchain application and smart contracts; (2) Situations
of Smart contracts in the basic of Blockchain application in some countries;
(3) Recommendation for Vietnam.
6
CHAPTER 1: UNDERSTANDING OF BLOCKCHAIN APPLICATION AND
SMART CONTRACTS
1.1. Definition of Blockchain and how it works
1.1.1. History, definition and types of Blockchain
History
Blockchain technology – dates back to the early 1990‘s, has to be one of the
biggest innovations of the 21stcentury given the ripple effect it is having on various
sectors, from financial to manufacturing as well as education.
The first work on a cryptographically secured chain of blocks was described in
1991 by Stuart Haber and W. Scott Stornetta. They wanted to implement a system
where document timestamps could not be tampered with. In 1992, Bayer, Haber and
Stornetta incorporated Merkle trees to the design, which improved its efficiency by
allowing several document certificates to be collected into one block.
The first Blockchain was conceptualized by a person known as Satoshi
Nakamoto in 20081
. Nakamoto improved the design in an important way using a
Hashcash-like method to timestamp blocks without requiring them to be signed by a
trusted party and introducing a difficulty parameter to stabilize rate with which blocks
are added to the chain. The design was implemented the following year by Nakamoto
as a core component of the cryptocurrency bitcoin, where it serves as the public ledger
for all transactions on the network.2
In August 2014, the bitcoin Blockchain file size, containing records of all
transactions that have occurred on the network, reached 20 GB (gigabytes). In January
2015, the size had grown to almost 30 GB, and from January 2016 to January 2017, the

bitcoin Blockchain grew from 50 GB to 100 GB in size.
1
Launched in 2008 by Nakamoto: Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, (2008);
for useful background materials, see also http://www.projectbitcoin.com/ and https://bitcoin.org/en/. 2
2 Nick
Szabo, Smart Contracts: Building Blocks for Digital Markets (1996)
7
The words block and chain were used separately in Satoshi Nakamoto's original
paper, but were eventually popularized as a single word, Blockchain, by 2016.
According to Accenture, an application of the diffusion of innovations theory
suggests that Blockchains attained a 13.5% adoption rate within financial services in
2016, therefore reaching the early adopters phase. Industry trade groups joined to
create the Global Blockchain Forum in 2016, an initiative of the Chamber of Digital
Commerce.3
In May 2018, Gartner found that only 1% of CIOs indicated any kind of
Blockchain adoption within their organizations, and only 8% of CIOs were in the short-
term "planning or active experimentation with Blockchain".4
Definition
Don & Alex Tapscott, authors Blockchain Revolution in 2016 stated that ―The
Blockchain is an incorruptible digital ledger of economic transactions that can be
programmed to record not just financial transactions but virtually everything of value.‖
A Blockchain is, in the simplest of terms, a time-stamped series of immutable
records of data that is managed by a cluster of computers not owned by any single
entity. Each of these blocks of data (i.e. block) is secured and bound to each other using
cryptographic principles (i.e. chain).
First and foremost, Blockchain is a public electronic ledger built around a P2P
system that can be openly shared among disparate users to create an unchangable
record of transactions, each time-stamped and linked to the previous one. Every time a
set of transactions is added, that data becomes another block in the chain. Blockchains
are a distributed ledger comprised of blocks. Each block is comprised of a block header
containing metadata about the block, and block data

3
R. J. Maestre. ―Así ha sido 2018 para las criptomone-das y esto esperamos en 2019.‖ World Economic Forum.
https://es.weforum.org/agenda/2019/01/asi-ha-sido-2018-para-las-criptomonedas-y-esto-esperamos en-2019/
(accesed Mar. 21, 2019)
4
‗Deep Shift. Technology Tipping Points and Societal Impact‘, World Economic Forum, Survey Report,
2015, p. 24
8
containing a set of transactions and other related data. Every block header contains a
cryptographic link to the previous block‘s header. Each transaction involves one or
more Blockchain network users and a recording of what happened, and it is digitally
signed by the user who submitted the transaction.
Blockchain can only be updated by consensus between participants in the
system, and once new data is entered it can never be erased. It is a write-once, append-
many technology, making it a verifiable and auditable record of each and every
transaction.
Blockchains are tamper evident and tamper resistant digital ledgers
implemented in a distributed fashion (i.e., without a central repository) and usually
without a central authority (i.e., a bank, company, or government). At their basic level,
they enable a community of users to record transactions in a shared ledger within that
community, such that under normal operation of the Blockchain network no transaction
can be changed once published. Hence, anything that is built on the Blockchain is by its
very nature transparent and everyone involved is accountable for their actions.
Blockchain implementations are often designed with a specific purpose or function.
Example functions include cryptocurrencies, smart contracts (software deployed on the
Blockchain and executed by computers running that Blockchain), and distributed
ledger systems between businesses.
There are two general high-level categories for Blockchain approaches that have
been identified: Public permissionless, and private permitted. In a permissionless
Blockchain network anyone can read and write to the Blockchain without authorization.
Permissioned Blockchain networks limit participation to specific people or
organizations and allow finer-grained controls. Knowing the differences between these
two categories allows an organization to understand which subset of Blockchain
technologies may be applicable to its needs. Despite the many variations of Blockchain
networks and the rapid development of new Blockchain related technologies, most
Blockchain networks use common core concepts. We can compare the differences of

categories with this table 1.1 below.
9
Table 1.1: Public Permissionless and Private permitted Blockchain5
Public permissionless Private permitted
Acess Read and write
Public to anyone
Read and write
Upon invitation only
Network Actors Don‘t know each other Know each other
Native token6 Yes Not necessary
Security Economic Incentives
Proof of work
Proof of Stake
Proof of Space
Proof of Burn
Etc.
Legal contracts
Proof of Authority
Speed Slow Fast
Example Bitcoin
Ethereum
Monero
Zcash
Steemit
Dash
Litecoin
Stellar, etc.
R3 (Banks)
EWF (Energy)
B3i (Insurance)
Corda

Effects Potential to disrupt current
business models through
disintermediation.
Lower infrastructure cost: no
need to maintain servers or
system admins radically
reduces the costs of creating
and running decentralized
applications (dApps).
Reduces transaction costs and
data redundancies and replaces
legacy system, simplifying
document handling and getting
rid of semi manual compliance
mechanism. In that sense it can
be seen as equivalent to SAP in
the 1990‘s reduces costs, but
not disruptive.
5
Shermin Voshmgir, Token Economy, 2019. Excepts available on https://blockchainhub.net. 6
The token is an
essential mechanism component to make this network of untrusted actors attack-resistant.
10
Blockchain has some basic features:
(a) Immutable
Immutability is undoubtedly one of the most significant Blockchain features. It
means that no Blockchain developer or user can alter or delete the data in the ledger or
add new content without any validation. This feature ensures immutability. When a
Blockchain transaction happens all the nodes in the network will have to say it‘s valid
or it won‘t get added to the ledger.
(b) Decentralized
Blockchain definition, you came across the word ―decentralized.‖ In reality, it
means that here is no single person or governing authority that looks over the
framework. But in a typical network structure, everything heavily depends on the
client-server model. But here, a single person or group looks after the whole
infrastructure. This is one of the significant benefits every Blockchain developer should
look for. It promotes user rights. Thus, it offers more benefits: (1) Gets rid of human-
made errors, so it‘s more fault-tolerant; (2) More control for users over their properties;
(3) Highly secure because it‘s more expensive, more hackers to stack the system; (4)
Gets rid of all third-party integrations; (5) No chance of being scammed as the system
runs entirely on algorithms; (6) Every change is reviewed by the nodes, which

promotes transparency and introduces an authentic architecture, people would have a
hard time cracking the code and attacking it.
(c) Enhanced Security
It gets rid of the central authority, but that does not mean that anyone can do
anything they want. That would be a severe risk to every node. In reality, to promote
privacy and security, all the data on the ledger is heavily encrypted. Here, in
Blockchain definition, a term called cryptography is heavily mentioned. In reality,
cryptography is one of the complex mathematical algorithms outside. There‘s no way
to crack the code. Furthermore, if anyone wants to change any value in the block, it
will generate a completely different outcome that won‘t be linked to the original
change. Additionally, every block comes with a unique hash
11
ID. However, changing the hash ID is impossible. Also, to make a Blockchain
transaction, need help from both public and private keys. Figuring out other users
private keys is also impossible.
(d) Distributed Ledger
Another cool feature of Blockchain is the distributed nature of the system. In
reality, all the nodes maintain the ledger, and so the overall computational power gets
distributed among them. In the case of the public Blockchain, everyone can see the
ledger without any issues. However, in private, the things change a bit, but still, it‘s
viewable.
(e) Consensus
The consensus is a crucial factor when it comes to Blockchain. Without
consensus, the Blockchain system won‘t work. In reality, the consensus algorithms help
the network make decisions. Without any consensus, no Blockchain can make a fair
judgment of the blocks being added.
Type of Blockchains
There are three primary types of Blockchains, which do not include traditional
databases or DLT that are often confused with Blockchains: (a) Public Blockchains like
Bitcoin and Ethereum; (b) Private Blockchains like Hyperledger and R3 Corda; (c)
Hybrid Blockchains like Dragonchain7
.

a) Public Blockchains which are open source, allow anyone to participate as
users, miners, developers, or community members. All transactions that take place on
public Blockchains are fully transparent, meaning that anyone can examine the
transaction details. Public Blockchains are designed to be fully decentralized, with no
one individual or entity controlling which transactions are recorded in the Blockchain
or the order in which they are processed. In addition, they can be highly censorship-
resistant, since anyone is open to join the network, regardless of location, nationality,
etc. This makes it extremely hard for authorities
7
Aaron Wright & Primavera De Filippi, Decentralized Blockchain Technology and The Rise of Lex Cryptographia.
12
to shut them down. Lastly, public Blockchains all have a token associated with them
that is typically designed to incentivize and reward participants in the network. b)
Another type of chains are private Blockchains, also known as permissioned
Blockchains, possess a number of notable differences from public Blockchains. In this
type, participants need consent to join the networks, and transactions are private and
are only available to ecosystem participants that have been give permission to join the
network. That‘s reason why private Blockchains are more centralized than public ones.
They are valuable for enterprises who want to collaborate and share data, but don‘t
want their sensitive business data visible on a public Blockchain. These chains, by their
nature, are more centralized; the entities running the chain have significant control over
participants and governance structures. Private Blockchains may or may not have a
token involved with the chain. Besides, there is another Blockchain type- Consortium
Blockchains. But sometimes they are considered a separate designation from private
Blockchains. The main difference between them is that consortium Blockchains are
governed by a group rather than a single entity. This approach has all the same benefits
of a private Blockchain and could be considered a sub-category of private Blockchains,
as opposed to a separate type of chain. This collaborative model offers some of the best
use cases for the benefits of Blockchain, bringing together a group of ―frenemies‖-
businesses who work together but also compete against each other. They are able to be
more efficient, both individually and collectively, by collaborating on some aspects of
their business. Participants in consortium Blockchains could include anyone from
central banks, to governments, to supply chains.
c) The hybrid nature of Dragonchain Blockchain platform is made possible by

patented Interchain capability, which allows people easily connect with other
Blockchain protocols. Allowing for a multi-chain network of Blockchains. This
functionality makes it simple for businesses to operate with the transparency they are
looking for, without having to sacrifice security and privacy. Also, being able to post to
multiple public Blockchains at once increases the security of
13
transactions, as they benefit from the combined hash power being applied to the public
chains.
1.1.2. Development of Blockchain recently
Ever since January of 2009, Blockchain technology has been growing and
evolving. What was once thought of as a fad, now stands on the brink of changing
technology in a way that history will come to see as the time before Blockchain, and
everything that came after.
The Blockchain evolves into something much more than what it started out as.
All new concepts go through a process of developing a refined set of advancements
along the way, Blockchain has been going through this transformation since its
inception.
In the beginning, the Blockchain was merely the technology supporting Bitcoin.
That beginning produced:
∙ Decentralization of currency and financial transactions
∙ Decentralization of data/information storage using a distributed, decentralized
database
∙ Eliminated the need for ―trusted‖ 3rd parties to verify transactions ∙
Resistance to censorship, immutable, and corruption
∙ Introduced the Proof of Work Consensus Method, which is what makes the
Blockchain unique as it combines computational processing power through the
use of nodes connected to the network. These nodes verify all transactions and
secure a public ledger.
Many experts could see that Blockchain had a use case that far exceeded
Bitcoin‘s need. They analyzed the situation by using the same method used to develop
the structure of the internet (known as the internet protocol suite or TCP/IP Stack) and
saw that Blockchain was introducing a radical change to the internet itself, and so the

need to act as a platform having its own applications built on top of its core just like
Windows OS was built on top of DOS.
However, the Bitcoin Blockchain at the time could not fulfill their expectations
since the source code did not allow for Turing complete smart
14
contracts. This means that their automated system could not simulate human behavior
and prowess.
Vitalik Buterin, a Russian-Canadian programmer, wanted Blockchain technology to
allow for this level of scripting, and since the Bitcoin Blockchain couldn‘t scale up
enough to make this happen, Vitalik decided to take it upon himself to get it done. In
2014 he put together a little project called Ethereum.
The Ethereum project was an evolutionary step in Blockchain technology,
which has seen many vast improvements. These improvements allowed for Blockchain
to become a platform through the concept of a virtual distributed machine. Ethereum
and other similar platform projects are known as distributed virtual machines because
they can run decentralized applications on their Blockchains.
This technology can now program conditional transactions and build Turing
complete smart contracts, giving it the ability to emulate human behavior. Another
thing that Ethereum brought was the ability to conduct micro-payments, so it can
handle small value transactions, which is essential if you want Blockchain
technology to apply to businesses (as an example) like large retail food chains or coffee
houses. With the ability to run applications on top of the Blockchain, it introduces the
concept of tokenized digital assets. An example of this would be Factbars.
Ethereum also birthed the idea of DAO, which is a decentralized corporation
running entirely on smart contracts. These would govern finances and company policy
on the Blockchain. But as the Blockchain and companies interweaved there were a few
problems that cropped up.
There was also the issue of cross-chain interoperability that if/when these
projects became the norm and the services need to interact to create user friendliness
amongst the varied applications on different Blockchains would be required.
15
Another issue was big data and widespread adoption. Would manually programmable

smart contracts be something practical to use? How would organizations analyze the
big data that Blockchains provided?
For these things to happen Blockchain technology needs to take another leap
forward. One answer is parallel transactions or directed acyclic graph technology,
which allows for many parallel streams of data to run at the same time on a network.
This has the effect of dividing up the work and preventing a bottleneck that can slow
transactions down to a crawl. This also allows for decentralized mining and cuts down
on fees.
Side chains also bring with them another solution. With these, you can transfer
a tokenized asset over to another Blockchain, which keeps the main Blockchain freed
up to handle more transactions while the transactions happening on the sidechain won‘t
be recorded until the users return the assets to the main chain, or a required recording
of assets by the main chain occurs.
Cross-chain technology will solve interoperability. Projects such as the
Lightning Network, which is still being built, will allow users and assets to
communicate and trade withholdings from another Blockchain.
It‘s always fun to look back at emerging technology to evaluate all the steps it
had to go through to get it to where it is today. Just like the days of Pong, which lead to
Atari, Nintendo, and then to PlayStation and so on. The Blockchain is quickly solving
the problems that stand in its way of becoming the biggest thing to technology since the
computer.
Today the Blockchain is probably a lot like where Atari was in the 80s, we are
still at the relatively early stages, but it won‘t be long before we see the Blockchain
reaching into all of our lives. And for those who know how to make the right
speculations, the chance to make money while helping this technology grow will be
there for the taking. One day we are going to look back and remember the days when
Blockchain took mass adaption, it‘s not that far away, and once we turn the corner, the
world is going to be a vastly better place.
16
1.2. Fundamental of Smart contracts
Blockchain technology can be used to implement other decentralised services
besides currency transactions where trust is inbuilt based on Blockchain intrinsic
properties. One of the main reasons is the extra features that can be incorporated on top

of Blockchain, one of the most important of which is probably the use of smart
contracts.
1.2.1. Definition, characteristics and mechanisms of Smart contract
Definition
A smart contract is a self-enforcing piece of so ware that is managed by a P2P
network of computers. Smart contracts are eccient rights management tools that
provide a coordination and enforcement framework for agreements between network
participants, without the need of traditional legal contracts8
. By another way, Smart
contracts are computer programs that are capable of carrying out the terms of
agreement between parties without the need for human coordination or intervention.
They can be used to formalize simple agreements between two parties, the bylaws of an
organization, or to create tokens. These agreements can be recorded and validated into
a Blockchain which can then automatically execute and enforce the contract usually
under ‗if-then‘ instructions: ‗if‘ something happens (for example, if you rent and pay
for a car and short-term insurance) ‗then‘ certain transactions or actions are carried out
(the car door unlocks and the payment is transferred). A smart contract enables two or
more parties to perform a trusted transaction without the need for intermediaries. The
way in which transactions are verified and added on the Blockchain guarantees that
conflicts or inaccuracies are reconciled, and that in the end there is only one valid
transaction (no double entries).
In the Internet we use today, the business models and ―raison d‘etre‖ of many
tech giants like Amazon, eBay, Airbnb, Uber, etc. result from the lack of such a trustful
native settlement layer. Smart contracts provide a solution to exactly that
8
Nick Szabo, ‗Smart Contracts: Building Blocks for Digital Markets‘ (1996),
www.fon.hum.uva.nl/rob/contracts_2.html accessed 22 January 2019.
17
problem. They can formalize the relationships between people and institutions and the
assets they own over the Internet, entirely P2P, without the need for trusted
intermediaries. Although the concept of smart contracts is not new, Blockchain
technologies seem to be the catalyst for smart contract implementation. A more
primitive form of a smart contract is a vending machine. The rules of a transaction are
programmed into a machine. You select a product by pressing a number related to that
product, insert the coins, and the machine acts as a smart contract by checking whether

you inserted enough money. If yes, the machine is programmed to eject the product,
and if you inserted too much money, it will also eject the change. If you didn‘t insert
enough money, you wouldn‘t get the product, or if the machine ran out of money, you
would not get your change back. Automatic vending machines not only slashed
transaction costs by making dedicated stores obsolete, but they also expanded service,
offering 24/7 availability instead of limited opening hours of a kiosk.
A smart contract can simply be defined as a computer code that runs on top of
the Blockchain.9
It contains a set of rules that determine how the involved parties can
interact with each other. So, whenever these predefined rules are met, automatically the
agreement is enforced. It‘s the purest form of decentralized automation.
The smart contract code is responsible for facilitating, verifying, and enforcing
the negotiation or performance of a transaction or an agreement.
The idea of smart contracts was initially conceived in 1993 by Nick Szabo a
cryptographer and computer scientist. He described them as a kind of digital vending
machines. At the time he gave an example that explained how users could input value
or data and in turn receive a finite item from a machine like a soft drink or a snack.10
9
https://hackernoon.com/a-brief-introduction-to-smart-contracts-53173x9g, accessed on April 2nd
, 2020. 10
Nick Szabo, Smart Contracts: Building Blocks for Digital Markets (1996),
http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/sza bo.
18
Szabo‘s original idea of smart contracts was broad enough that some smart
contracts will fulfill the requirements of a legally enforceable contract while others will
not11
. Szabo‘s idea lay dormant for many years because the technology did not yet exist
to support the implementation of smart contracts12
. Then, in 2009, the Bitcoin
blockchain emerged itself a limited form of a smart contract13
. Later, Ethereum offered
an enhanced ability to build more complex smart contracts by using a specific smart
contract language (Solidity) to enable developers to write complex processes in a short
span of code14
. The rise of these protocols led to the resurgence of the smart contract
idea and its increasing popularity as a tool for enhancing business processes and
efficiencies. Integrating Szabo‘s original idea into the new technological age of
blockchains, however, has proved more difficult than perhaps initially anticipated.

11 Carla L. Reyes, Conceptualizing Cryptolaw, 96 NEB. L. REV. 384, 396 (2017).
12
William Mougayar, 9 Myths Surrounding Blockchain Smart Contracts, COINDESK (Mar. 23, 2016),
www.coindesk.com/smart-contract-myths-blockchain/.
13
Reyes, supra note 3, at 396-97; Richard Gendal Brown, A Simple Model for Smart Contracts, (Feb. 10,
2015), http://gendal.me/2015/02/10/a-simple-model-for-smart-contracts/
14
William Mougayar, The Business Blockchain: Promise, Practice and Application of the next Internet
Technology (2016).
19
Chart 1.1: How smart contracts
work15
Sell house Match Buyer with Seller
EXCHANGE
Contract receives assets
Contract distributes assets
Buy house
Clearing and settkement
is automated
Assets of Seller and
Buyer
digitize the Currency
Ownership is
undisputed
a) On-chain
assets (Digital)
Pre
defined contract
Events Execute & Value
transfer
Settlement b) Off-chain
1 2 3 4 Step 1: Terms are established by all
counterparties, such as: ∙ Variable interest
rate
∙ Currency of payments
∙ Currency rate
assets (Physical)
∙ Conditions for execution (e.g: time and date, LIBOR rate at given value) Step

2: Event triggers contract execution
∙ Even can refer to:
∙ Transaction initiated
∙ Information received
Step 3:
15 https://www.cryptosbeginner.com/what-are-smart-contracts/
20
Terms of contract dictate movement of value based on conditions met
Step 4:
a. For digital assets on the chain, such as a crytocurrency, accounts are atomically
settled
b. For assets represented off the chain, such as stocks and fiat. Changes to accounts
on the ledger will match off-chain settlement instructions.
Characteristics
A smart contract has the following characteristics:
∙ Self-executing: A smart contract is a self-executing contract with the terms of the
agreement between buyer and seller being directly written into lines of code. The code
and the agreements contained therein exist across a distributed, decentralized
Blockchain network. Contract operations can be self-executing -
occurring automatically, without taking the further step of being ―self-enforcing,‖ like
the difficult-to-reverse step of forfeiting a deposit through a Blockchain transfer. Only
slightly less visible than the efficiency advantages to codified contracts are (he easier
and better communications between contract makers and contract implementers, and
the potentially enhanced trust among contracting parties that may flow from employing
reliable, transparent, automated operations inside a Smart Contract.16
∙ Immutable: Once a smart contract is deployed, the code cannot be changed by a
party unilaterally. Thanks to the immutability feature, the performance of the contract
is guaranteed to take place in exactly the same manner in which it is coded; the contract
does not allow for any modifications and/or reversal. Furthermore, unless programmed
to do otherwise, it will remain on the Blockchain forever and cannot be misplaced or

lost. The history of the transactions forming part of the contract is also recorded on the
Blockchain forever and thus this too makes for greater transparency and safekeeping.
16
Marcelo Corrales, Legal Tech, Smart Contracts and Blockchain, Perspectives in Law, Business and
Innovation, Springer Nature Singapore Pte Ltd, 2019, https://doi. Org/10/1007/978-13-6086-2_1.
21
∙ Self-verifying: Smart contracts can self-verify the conditions that are placed
inside a contract by interpreting data. ... A triggering event such as a due date,
expiration date, strike price or other conditions is set so that the contract is easily
interpreted and automatically executed according to the terms written in the code.
∙ Auto-enforcing: A smart contract is a self-enforcing agreement embedded in
computer code managed by a Blockchain. The code contains a set of rules under which
the parties of that smart contract agree to interact with each other. If and when the
predefined rules are met, the agreement is automatically enforced.
Specifically, Smart contracts can also be applied for the benefit of consumers by
automatically enforcing their rights (instead of their duties). For example, these
consumer- friendly Smart contracts are becoming increasingly widespread in the
insurance industry, with Blockchain-based insurance policies providing for pay-outs
that are automatically triggered once predetermined parameters are met. For instance,
flight-delay decentralized application provide for such automated payments whenever
flight-delay decentralized applications provide for such automated payments whenever
flight delays or cancellations arise.17
Mechanisms
The operation of smart contracts can hardly be decoupled from the underlying
Blockchain. State of a Blockchain is updated when a valid transaction is recorded on
chain, and smart contracts can be used to automatically trigger transactions under
certain conditions. We categorize smart contracts to public smart contracts and
permissioned smart contracts according to the Blockchain platforms they operate on.
As the expectation and requirements for smart contracts are often diff erent for the two
categories, we below discuss them separately. We consider all smart contracts on
permissioned, consortium or private Blockchains as permissioned smart contracts. 18
17
Philipp Hacker, Regulating Blockchain: Techno- Social and Legal challenges

18
A. Legerén-Molina, Ed., ―Los contratos inteligentes en España,‖ in Revista de Derecho Civil, Apr. 2018.
[Online]. Available: https://www.nreg.es/ojs/index.php/RDC/article/view/320/267
22
∙ Public Smart contract: Public Blockchains set no requirement for peers to
participate, hence all peershave the right to deploy smart contracts. In order to prevent
spamming, wheninstantiating or invoking smart contracts on a public Blockchain, one
is often required to pay a certain amount of fee. Limited by its functionality,
thescripting language used in Bitcoin–Scripts –is hardly used in constructing complex
contractual terms. While the general-purpose Solidity language in Ethereum can be
used for a much wider variety of applications. Accordingto Etherscan, among the one
million Ethereum accounts that altogetherhold 105.6 million Ethers, a half of them are
contract accounts with a totalbalance of 12 million Ether. Competitors such as Neo and
EOS, are also independent Blockchains facilitating peer consensus and smart contracts.
To show the popularity of diff erent platforms, we obtained the number ofpublicly
available smart contract projects deployed on Github from thebeginning of 2015 till
early 2019.To give readers an intuitive idea of how smart contracts work on pub-lic
Blockchains, we below explain the mechanism of Ethereum contracts. Ethereum uses
PoW mining protocol for network consensus. Ethereum smart contracts reside in
Ethereum Virtual Machines (EVMs),which isolates them from the Blockchain network
to prevent the code running inside from interfering with other processes. Once
deployed, the smartcontract obtains a unique address that is linked to a balance, similar
to anexternally controlled account (EOA) owned by a user. A smart contract cansend
transactions to an EOA or another contract.
∙ Permissioned Smart contracts: Permissioned smart contracts, residing on
permissioned Blockchains are be-coming increasingly popular in business
collaborations. Compared to the in efficient and expensive validation processes of
public Blockchains, permissioned Blockchains are more suitable in stimulating
business collaborations. As an example, the Hyperledger project, primarily driven by
the Linux Foundation, aims to improve business processes and collaborations that
involve multiple parties. Among the collection of projects in Hyperledger, Fabric
serves a foundation. Compared to public PoW Blockchains, Fabric reduces the cost of
consensus by implementing a Practical Byzantine Fault tolerant (PBFT)
23

protocol, and leveraging channels for parallel and secure transaction processing.
Channels allow participants to form virtual groups and keep their independent ledgers
that are invisible to other channels. Channels provide the flexibility for business
consortium to securely share information only to relevant parties. On a Fabric network,
transaction ordering is handled by a central orderer that collects transactions submitted
by committers and takes votes from endorsers for permanently recording transactions
in blocks. The blocksize can be customized in either number of transactions or time of
waiting. Chaincode is the equivalence of smart contracts in Hyperledger. All
participating peers are required to execute all transactions and smart contracts
individually for synchronization. The IBM Blockchain is built on top of Fabric. In
addition, to further reduce the burden of Blockchain peers, some suggest that complex
business logics should be moved to a separate middle layer beyond the Blockchain. For
instance, Microsoft Azure is developing Cryptlets, where a central host executes smart
contracts to support the separation of data and logic on permissioned Blockchains.
1.2.2. Benefit and potential application of Smart contract in realistic
Table 1.2: Traditional and smart contracts19
Traditional contracts Smart contracts
1-3 days Minutes
Manual remittance Automatic remittance
Escrow necessary Escrow may not be necessary
Expensive Fraction of the cost
Physical presence (wet signature) Virtual presence
Lawyers necessary Lawyer may not be necessary
19
https://twitter.com/DeepLearn007
24

Benefit of smart contracts
(a) Accuracy: One of the advantages that business organizations would benefit from
the implementation of smart contracts is accuracy. As explained in the processes of
setting up a smart contract, all the information regarding the contract is expressed in a
conditional format, using the if-then statements. For instance, ownership of virtual
resources with support for their transmission and atomic exchange can be realized. To
do this, the following form of statements can be used: 1) "Participant X is an owner of
resource A"; 2) "Participant Y proposes to exchange resource A to their resource B
from participant X (or any other, or from the list)"; 3) "Participant X is agreed to the
exchange of resource B to A from participant Y"; 4) "Participant Y cancel the offer of
exchange of resource A to B from participant X". Statement "1" can be used for the
transmission and creation of a resource. For atomic exchange, statement "2" can be
used and followed by "3" or "4" in case of cancel the offer20
. It should be noted that
users could publish statements without having the necessary resource. Such statements
should be ignored, and it is necessary to track who owns what resources, considering
the entire history of the transactions to determine the invalid statements.
20
https://www.researchgate.net/figure/Smart-contract-usage-example_fig3_324590823
25

Participant X Participant Y
Blockchain
Smart contract
Exchange of Resource A
Sides: Participant X, Participant Y
Resource : A
Statement :
If requirements_list is met
Then doExchange(X, A, Y B)
ChangeOwner(A, Y)
ChangeOwner(B, X)
Else CancleExchange()
Since the majority of the contracts entail the exchange of cash. Then the smart
contracts can be synced with cryptocurrencies such as Etherium, Lite Coin or bitcoin,
among others, an aspect that would further enhance the robustness, accuracy, and
performance of the entire system. The expression of all terms and conditions in a smart
contract must be explicitly and accurate. Essentially, this is a critical requirement
because transaction errors may emanate from any omission. Therefore, the automation
exhibit in the smart contracts avoid the majority of the issues that are found in the
traditional contracts.
(b) Clear Communication and Transparency: Virtually, the terms and conditions of
the contract terms and conditions become explicitly visible to the different network
players of the specific Blockchain. Hence, changes cannot be easily implemented, once
the contract is established. Each of the transaction by either party to the contract is
monitored and controlled by other network nodes in the
26
Blockchain. As a result, transparency is promoted, and issues of fraud are eliminated.
In the modern era, various cases have been reported whereby the organizational is
accused of defrauding the customers and not offering them the value of their money.

As aforementioned earlier, each sale of good or service by an organization results in a
contract that may or may not be legally enforceable. However, in various cases, one or
more parties to the contract may breach the contract terms and conditions. In the case
of sales, anorganization may overcharge the customer or may shorten the service
package timespan agreed, without notifying the customer. The implementation of the
smart contracts puts every detail of the contract into the light. Unlike in the traditional
contract where the organization would have to use the legal framework as the
intermediary, in the virtual world all that is needed is other nodes in the network, who
are tasked with the responsibility of ensuring that each of the transaction pertaining to
the contract is accurate and valid21
.
(c) Speed and Efficiency Essentially, smart contracts do not rely on human
intervention, and their implementation is guided and overseen by other nodes in the
Blockchain network. Therefore, once the contract is triggered, the scripted contract
self-executes. This is often achieved through the use of trigger events when scripting
the contact. For instance, a trigger event may be a date, time, or even an activity
initiated by a party to the contract, such as the transfer of certain units of
cryptocurrency from the customer‘s wallet to that of the company. Once a trigger event
happens, the contract now starts executing itself. For instance, for online subscription-
based organizations, once a specific unit of the cryptocurrency is received, then the
subscription for the customer is auto-renewed. Unlike in the traditional contracts that
are less efficient and which require some form of human verification, here, the
verification of whether the correct amount has been paid, and whether the correct
subsection, service, and associated aspects have been given to the number is
determined by the nodes in the Blockchain network. As such, there is no longer
reliance on the organization's developed system to determine the
21
Chandler, R. (2016). Smart contracts. Wroclaw: Amazon Fulfilment.
27
contracts with the customers. The organization also has no sovereign authority over the
transactions as well as over the contractual agreement with the partners. Each contract
is targeted as a separate entity, and each transaction, irrespective of its origin is first
validated. Overly, this results in a fast, resilient and robust way of contract execution
(d) Security A study by Marino and Juels finds the smart contracts to have one of

the highest security measures. Smart contracts implemented through block chin
technology entail the use decentralized network made of non-trusting parties. The fact
that the parties in the network are non- trusting makes them keep check of one another
to ensure each transaction is carried out effectively, and that there is a uniform
worldview of the status of all the transactions. Again, Blockchain technology is
implemented through cryptography techniques. This technology entails high encryption
of data and the use of both private and public keys for reading the transactions in each
Blockchain, as well as executing.
(e) Cost Reduction: Essentially, top business managers are credited with the
responsibility of coming up with strategies and ways of reducing costs in an
organization. The main aim of setting up a business enterprise is to make profits;
therefore, all the activities in an organization must be construed in a manner that
promotes the achievement of corporate objectives, as well as maximizing the wealth of
the shareholders22
. In the recent wold that has seen a vast technological revolution, the
success of the business enterprises is vested in their ability to keep tabs with the
prevailing technologies and adopt ensures and techniques that otherwise increase the
employees' productivity and performance. The implementation of smart contracts
through Blockchain technology cuts the need for a middleman, such as the legal
personnel. This, in turn, aids in reducing the overall organizational costs and
maximizing the profit margins by an organization. In the case of multinational
corporations that deal with a huge number of contracts on a daily or weekly basis, the
implementation of smart contacts with its business partners and customers can greatly
aid in reducing the
22
Saleem, M. A. (2017). The impact of socio-economic factors on small business success.
28
various costs incurred in the traditional forms of contracts. The contracts can further
bolster the efficiency of the organization, which is a critical ingredient for
organizational success and increased performance. It is, however, critical to note that
despite the security, cost reduction and efficiency aspects associated with the smart
contracts, the latter is not by any chance magical, and hence may be subject to flaws.
For instance, the quality and execution of the contract highly depend on the input,
which is basically the coded version of the contract. Therefore, if there are flaws in
setting up the smart contracts, such flaws may trigger adverse effects as well as poor

quality of the output generated.
Few innovations in the Blockchain world have been as revolutionary as smart
contracts. A type of self-executing agreement where the terms between buyer and seller
are directly written into the code itself, these mechanisms unalterable, almost
impossible to hack, and helps guarantee that both sides to an agreement aren‘t ripped
off.
Smart contracts also allow for more complex transactions to be carried out
between two anonymous parties without the need for a central authority, enforcement
system, or legal guidance. Essentially, this means that smart contracts can be
programmed to enable a wide variety of actions.
Potential application of Smart contract in realistic
With a number of smart contracts bringing listed above, no one doubts their
long-term staying power and ability to truly revolutionize the world we live in. Hence,
Gartner – known as a global research and advisory firm providing information, advice,
and tools for leaders in IT, finance, HR, customer service and support,
communications, legal and compliance, marketing, sales, and supply chain functions,
has estimated that by 2022, so called ratified unbundled smart contracts will be in use
by more than 25% of global organizations23
. There are many industries that can benefit
from this kind of technology:
23
https://www.gartner.com/en/newsroom/press-releases/2020-01-30-gartner-predicts-that-organizations
using-blockchain-
29
Public Smart Contracts
Public Blockchains enable convenient development and testing of smart
contract applications or dApps. Public smart contracts make it possible for startups to
raise funds through ICOs. Big enterprises on the other hand, mainly want to take the
advantage of permissioned smart contracts for incorporating their models and enforcing
business procedures. Some of the popular use cases include: banking, Electronic
Medical Record (EMR), IoT data management. In addition, there are also other
interesting applications such as smart waste management, real estate, and ride
sharing arcade city.

∙ Health Care and Medical Records: One major application area of smart contracts
is related to healthcare and access control of medical records. Blockchain technology
and smart con-tracts are seen by many healthcare professionals as a secure way of
sharing and accessing patients‘ EMR. Smart contracts can feature multi signature
approvals between patients and providers to only allow authorized users or devices to
access or append the record. They also enable interoperability via collaborative version
control to maintain the consistency of the record. Besides benefit patients and their care
providers, smart contracts can also be used to grant researchers access to certain
personal health data and enable micro-payments to be automatically transferred to
patients for participation. However, the realization of these applications is limited by
the immature infrastructure of most public Blockchains and high development costs.
There are also concerns about policies and users‘ willingness to publicize their personal
information.
∙ Identity Management: uPort is an identity management framework that leverages
public Ethereumsmart contracts to recover accounts and protect user privacy in the case
ofa device loss. The main component uPort identifier is a unique 20-byte7 hexadecimal
string representing the address of a proxy contract that lies in-between a controller
contract and an application contract. uPort enables users to replace their private key
while maintaining an on-chain persistent identifier. If a valid user brings a new device,
she can seek for approval from a list of existing recovery delegates, and replace the old
user address with a new one. Similarly,
30
Sovrin is a digital identity management platform built on a public Blockchain. Identity
management frameworks using Blockchain still need to go through a number of
enhancements before adoption. In the case of uPort, the publicity of the recovery
delegates of a user poses the security risk of compromising user identities.
Permissioned Smart Contracts
Permission smart contracts has been used for the more sensitive business use
cases such as banking, supply chain, Internet of Things (IoT) because the public smart
contract has many risk threat to user privacy.I will talk about some of the permissioned
smart contracts use cases below:
∙ Banking: Smart contracts can be used to enforcing rules and policies in
banking, forexample, the mortgage service. According to a report made by Capgemini

Consulting, with smart contracts in mortgage, consumers could potentially save 480960
USD per loan, while banks would be able to cut 3-11billion USD of annual costs in the
US and Europe24
. Banks can also use smartcontracts to streamline clearing and
settlement processes. It has been reported that more than 40 global banks have
participated in a consortium totest smart contracts for clearing and settlement activities.
In addition,the know your customer (KYC) and anti money laundering (AML)
policiescan also be embedded easily with the smart contract logic. However , the
compatibility of legacy system with permissioned smart contracts is a big challenge and
people have difficulty when expanding them. And the most important thing is secure
against attacks thatare aimed at stealing of assets or tampering of the contract code.
∙ Provenance & Supply Chain: Blockchain can be used to enable some of the
key properties in supply chainsand logistics including transparency, optimization,
security and visibility of various operations in the transportation of goods. A supply
chain with continuous, real-time access to reliable, shared data is more efficient than
traditional supply chains. Provenance of the product via the blockchain also raises the
bar on quality in production by reducing the risk of
24
https://www.capgemini.com/consulting-de/wp
content/uploads/sites/32/2017/08/smart_contracts_paper_long_0.pdf
31
wastage and spoil age.Despite the advantages of using blockchains , the resistance from
banks, exchange networks and trusted intermediariesmay also delay the blockchain
adoption.
∙ Insurance: In the insurance industry, smart contracts can perform error
checking, routing, approve workflows, and calculate payouts based on the type of
claim andthe underlying policy. For example, the processing of travel insurance
claimscan be automatically verified against flight delays or cancellations. Smart
contracts can help remove the human factor involved in the process, there-fore
decreasing the overall administrative cost for the insurers and increasing the
transparency for the consumers. Nonetheless, technological limitations and legal
regulations are major challenges to be addressed before shifting to smart contracts for
insurance policies. Another drawback is the inflexibility of smart contracts. Traditional
contracts can be amended or terminated upon agreement between both parties, but
smart contracts as computer programs have no such mechanism. Moreover, more

authorities are needed to recognize the legality of financial smart contacts.
Overall, smart contracts facilitate development of decentralized applications
and have great potential to reshape business procedures.
∙ IoTA promising but controversial application scenario is the use of
blockchainand smart contracts for IoT data management. Intuitively, as both
systemsare decentralized in nature, blockchain could be used to enhance trust inIoT
systems that constantly share and exchange a large amount of data.However, the other
properties of blockchain and IoT do not seem to fit naturally together. Firstly, IoT data
is often sensitive, and should not be sharedwith everyone else. Secondly, blockchains
are resource-consuming. Even withlighter consensus mechanisms, having all IoT
devices to execute all programsis redundant considering their limited processing
capability. Similarly, Chain of Things is also trying to merge blockchainwith IoT to
achieve security, reliabiltiy an interoperability.
32
1.2.3. Overview about challenges of Smart contracts
Although smart contracts have great potential to reduce transaction cost and
minimize outcome uncertainty, that currently can replace only the types of contractual
provisions that can be represented in specific and objective terms, such as ―If X
occurs, then execute step Y‖. Subjective provisions, such as whether a party used
commercially reasonable efforts, cannot be translated into smart contracts. In this
respect, smart contracts are not particularly ―smart‖.
In addition, smart contracts will often need to rely on external (for example: off-
chain) resource before they can execute transaction. The reliance on off-chain
resources; rather, that data must be ―pushed‖ to the smart contract, so the parties need
to agree on a single, definitive, off-chain resource willing to and capable of pushing
relevant data to the smart contract. Without such clarity, there would not be consensus
as to whether to the contract should trigger, and the transaction would not execute.
In order to address these issues, parties to smart contracts use ―oracles‖-trusted third
parties that retrieve mutually-agreed off-chain information and then push that
information to the smart contract at predetermined times. While oracles represent an
elegant, and for the time-being necessary, solution to smart contracts‘ functional need
to access off-chain resources, they introduce a potential point of failure in what might
otherwise be a fully automated and decentralized transaction system. An oracle might

cease conducting business, experience a system failure, be hacked, or provide
erroneous data. Indeed, a hacker looking to impact smart contracts would likely have
an easier time exploiting the oracle‘s data feed than hacking the smart contract itself.
Moreover, the disadvantages of the smart contacts limit their application in various are
relating to technology often outpaces the law and the regulatory framework. This has
been a noticeable trend with respect to smart contracts.
33
1.3. Detailed challenges
Technical challenges
a. Immutability
Essentially, since smart contracts are scripted as a piece of codes, once set up,
the contacts cannot be modified easily. In the traditional contracts, amendment of terms
and conditions is often used, especially in long-term contracts whose execution is
depending on real-life dynamics, and the conditions keep changing. Owing to the
rigidity exhibited in the smart contracts after being established, the latter results in a
wide array of practical problems more so with respect to the ease of modifying the
contract terms in depending on various situations. The implementation of smart
contracts. To a greater extent, makes it literally impossible to achieve analogous goals.
Nevertheless, various actions can be taken in order to include aspects of modification
and contract annulment. For instance, an escape hatch can be included in the coded
contract. The escape hatch can be used to allow for the modification of the contract
terms, in order to cater for the real-life contracts which are characterized by vast
dynamics. Nevertheless, implementing such in the smart agreements may compromise
the security apparatus, and hence may require further tightening of the transaction
controls in order to ensure that the escape hatch is not used to initiate invalid
transaction or transactions that are aimed at unauthorised manipulation of records This
is as well noted by Kolvart et al., who explains that owing to the complexity of the
smart contract and Blockchain technology in general , ensuring that the right
permission is granted to the right node, and that all the nodes can monitor the
amendment of the contract may be quite tricky but necessary.
b. Contractual Secrecy
Mostly, the Blockchain technology entails the sharing of smart contract across

all the nodes in the Blockchain network, since all the transaction is recorded on general
ledger using encoded permissions in each of the nodes. Essentially, the Blockchain
technology entails the use of anonymity, whereby all the
34
participants in a Blockchain network are anonymous and secured. However, there is no
security of the contract execution. This is because though the nodes are anonymous in
their operations, the ledger is maintained public, and hence, the transactions are visible,
and there is no security of such. Buterin explains that this is an area that needs to be
focused because despite the nodes being anonymous, the maintenance of a public
ledger in the distributed environment results in a privacy lapse. While the essence of
the smart contracts is to maintain a public ledger that is visible to all parties in the
network and to monitor the validity and accuracy of the taxations, there is the need also
to develop a protocol, which can aid in the verification of the transactions without
necessarily reading the contents of the transaction. This is because though the
participants and the origin of the transaction may be anonymous, the contents are not;
and actually, each node can read and access the transaction contents. It is as well
critical to developing measures to curb this privacy issues since security is not all about
anonymity and encryption, it also entails ensuring the content of the transaction is
protected against access by other parties. As such, this aspect of smart contracts is yet
to be fully addressed.
Legal Adjudications and Enforceability
Traditionally, the establishment of a valid contract covers various constructs,
which make it legally enforceable. We know that the key characteristics of a legally
enforceable contract are; offer by one party or parties, acceptance by the other party or
parties, a promise, consideration, and legal capacity mutuality and in some contracts, a
written instrument. While these elements of a contract are very critical, some of them
are not applicable to smart contracts. For instance, the financial sector exhibits
immense regulations by the government, and specific permissions and licensures are
required for a form to engage in transactions execute don general ledgers. However,
despite the licensure and associated approvals, the legal enforceability of the smart
contracts is yet to be established and synced with the contract law as well as other laws
that give financial transactions. All elements of aspect contracts are expressed as
segments of code, and the

35
aforementioned elements of a valid contract may not necessarily be identifiable. This,
therefore, necessitates the need for the translation of the legal framework governing the
contracts into the software logic to ensure that besides the smart contract being self-
executing, they also adhere to the legal regulations of formal contracts. Further, such
tantalization should take in to account the Blockchain developer's point of view, the
lower's point of view and the transacting parties' points of view. Such an aspect would
aid in enforcing the legality and validity of the contracts. However, as at present, the
organizations that have implemented the smart contracts through Blockchain
technology have to continuously struggle with the aspect of the contract validity and
enforceability. Nevertheless, the smart contracts is that breaches of contracts are rare to
occur, as the execution of the contract is dependent on the predefined conditions which
are also triggered by an event that neither of the nodes in the network has control over.
36
CHAPTER 2: SITUATIONS OF SMART CONTRACTS WITHIN
CURRENT FRAMEWORKS
2.1. Overview framework and policy of Smart contract in some countries
Contracts play a central role for the ordering of liberal market relations and
therefore have an irreplaceable importance for Western and other societies.
Accordingly, contract law is probably the most important private law institution of
individual self-determination and autonomy and it evolved continuously to respond to
the emergence of new contract models. Today, like many other legal institutions, it
faces the challenges of digitization. Next to Big Data analytics and Artificial
Intelligence, especially smart contracts pave the way for a new era of contracting and
pose a potential challenge to the prevailing concepts of contract law.
Despite the fact that the use of smart contracts is being used in many
transactions, many legislations do not yet stipulate a legal framework that regulates
commercial matters carried out in this means that allow legal certainty by assuming
that those with whom it is treated will respect their commitments as in conventional
agreements.
This may be due in part to the complexity of these technologies, and mostly to

the more general inability of modern States‘ legislative process to follow the rapid
evolution of technology. Speaking of smart contracts, their legal status is also totally
―unclear‖, and very little has been written with this regard and here are some of the
issues that arise.
(a) Formal requirements: To take some simple examples: perhaps in a given
jurisdiction a contract needs to be on paper or be notarised, or perhaps not. As an
example, Swedish law normally accepts oral agreements as valid but only paper
contracts when it comes to real estate. At the same time, unlike other countries,
Swedish law does not require the use of notaries. Similarly, there may be requirements
that a contract be in a language that both parties can understand. Can computer code be
considered such a language? And if so, would we then have a need for ―translations‖
of this language into others, like normal human language,
37
and thereby also need rules for what constitutes a legally binding translation of a smart
contract to say German, French or talian?
(b) Signing requirements: Another question affecting whether a smart contract is
legally binding has to do with who ―signed‖ it, and how this signature has been carried
out.
As in the off-chain world, the signer needs to have the authority to sign. In the off-
chain world organisations will often have designated people with signature authority.
As digital documents, smart contracts need to be signed in some digital way. That
brings up a number of problems.An automated smart legal contract requiring such
digital signatures will need to be able to ascertain if the signature is valid, if it refers to
the correct person and, if so, if that person really has the authority to sign. In
commercial settings, this could mean being able to access company databases or some
other reliable oracle. These, in turn, would need some sort of legal standing.
(c) Immutable of Smart contracts: The more ―automated‖ a smart contract is, the
trickier the legal issues can become. To many, one of the great advantages of smart
contracts is that they can be used to write ―tamper-proof‖ agreements, meaning they
cannot be changed after they are deployed. The advantage is that they will execute as
written no matter what – holding, in theory, the parties to their commitments through
the inexorable might of code.
There might be changes in the law, in applicable regulations, in the business

environment, or other relevant spheres that would necessitate a change in the smart
contract. What legal recourse would the parties have if the smart contract they have
deployed cannot be accessed and modified? Also, there are a lot of events that may
occur in the off-chain world that affect, by law, the content of rights and obligations of
the parties to the smart contract. If appropriate functionality is not included in the code
to allow for the adoption of the changes in the legal contract, the smart contract could
perform non-valid legal actions. In a situation where, for any reason, the automatic
execution of a legal contract by a smart contract breaches contractual obligations, the
subsequent obligation will arise to make appropriate settlements
38
between the parties (e.g. returning the transferred assets or paying their value). Thus,
despite the use of smart contracts, the obligation to make off-chain settlements may
arise. The creditor (or potentially the consumer) would have to enforce such obligations
in the real world. If no collateral for meeting obligations has been established, the
primary and only tool for the enforcement of contractual liability is to use the judicial
system. Creditors may sue the debtor before the court, but the decision of the court may
be enforceable only if the debtor is an identifiable entity.
The conclusion is that the use of smart contracts does not resolve or eliminate the
problem of breaches of contract, contractual liability and enforcement. The problem of
the lack of available tools to easily identify actors on a Blockchain based network
therefore arises again. It will require a solution, not only in relationships between
Blockchain players and state authorities, but also in vertical relations between the
participants of the Blockchain space. Otherwise, the current system of consumer (or
any creditor) protection, currently based on judicial system and enforcement of
liability, may no longer be effective.
(d) Smart contract audits/ quality assurance: There can also be serious issues if a
smart contract has a flaw: a bug in an agreement that deals with asset transfers can be
very damaging indeed. Yet it need not necessarily be a bug. Depending on the
complexity of the agreement, it can be extremely difficult to correctly or adequately
encode contract terms. A smart contract might execute as written and yet still behave in
ways not foreseen by its writers. For this reason, smart contract ―audits‖ – often
complex, highly technical processes to check for the validity and viability of smart
contract code – become important. That raises the question of whether such audits have

to become requirements, or also need legal recognition of some kind to make a smart
contract valid? This has yet to be decided.
(e) Legal status, effect and enforceability of Smart contracts generally: If the results
of transacting on Blockchains cannot come to manifest in the real world, and be
capable of protection in the real world, their potential is significantly diminished. The
act of transacting, even if devoid of requiring any element of trust, must result
39
in an enforceable change over rights attaching to or deriving from the asset concerned,
whether this is a token or is represented by a token. For the assets transacted on
Blockchains to exist in the real world, they should be vested with rights in rem. It will
likely prove desirable, if not imperative, that participants in Blockchain networks can
maintain confidence, legal certainty is at play vis-à-vis the binding nature of the
contractual transactions on the Blockchain. There is a plethora of possible choice of
law approaches for the proprietary effects of transactions conducted on Blockchains.
Employing traditional rules, such as applying the law of the place in which the property
or claim to property is situated on issues relating to rights or entitlement over crypto-
assets would not be legally feasible. Neither would applying the law of the place where
an ―administrator‖ resides be workable, particularly in relation to public,
permissionless Blockchains. It is also clear that there is no panacea solution to this
challenge, as different crypto-assets and varying levels of decentralisation would attract
different types of solutions respectively. It could be that a solution whereby participants
elect the governing law of the Blckchain, as a fundamental aspect of the Blockchain‘s
creation and existence, will prove to be most effective.
In this thesis, I will take some countries typically follow the common law and the
civil law which are USA, Germany and Japan – developed countries in Blockchain
technology to compare and evaluate legislation is this feature.
2.1.1. Current legal frameworks in some countries
In USA
Given that the use of smart contracts is in its incipient stages, there is no case
law precedent that directly addresses the enforceability of smart contracts and, as
discussed below, there are only a handful of state statutes purporting to address this
issue directly. However, the fact that smart contracts are not drafted in natural language
prose should not impact their enforceability under the principles generally applicable to

contracts.25
25
For a comprehensive overview of the enforceability of smart contracts, see “Smart Contracts” &
Legal Enforceability (Cardozo Blockchain Project Research Report No. 2, Oct. 16, 2018;
40
The Uniform Commercial Code and Statute of Frauds
As a preliminary matter, in order to be legally enforceable, smart contracts must
comply with applicable state writing and signing requirements. The most relevant
requirements in this respect flow from two sources: the Uniform Commercial Code
(―U.C.C.‖), a comprehensive set of laws governing all commercial transactions in the
United States; and state laws that identify agreements that must be in writing and
signed to be enforceable (referred to as the ―statute of frauds‖). The U.C.C. has been
adopted in whole or in part by all 50 states, the District of Columbia, Puerto Rico, and
the Virgin Islands; and all states except Louisiana have adopted a statute of frauds.
The “written agreement” requirement
Under the U.C.C. and statute of frauds, not every contract needs to be in
writing. Under the U.C.C., the following contracts generally must be in writing: (i) a
contract for the sale of goods priced at or over $500;6 (ii) lease contracts relating to
personal property requiring total payments of $1,000 or more; and (iii) certain
agreements creating a security interest. The specifics of what terms must be in writing
vary by the subject matter. For example, a contract for the sale of goods must generally
specify the goods at issue and the price, while a lease must generally include the
required payments, the term, and a reasonable description of the leased property.
Similarly, each state‘s statute of frauds generally requires a written agreement for: (i)
agreements relating to executorship, suretyship, marriage; (ii) performance to be
undertaken over one or more years after the execution of the agreement; and (iii)
agreements for the sale of an interest in land.26
The question is whether a smart contract, effectively a piece of computer code,
can satisfy the writing requirement under the U.C.C. and statute of frauds. Historically,
courts have recognized that under the U.C.C., a written agreement does not necessarily
need to be natural language prose. Indeed, the U.C.C. specifies that any type of
―intentional reduction to tangible form‖ is sufficient. This is consistent
26
Uniform Law Commission, Guidance Note Regarding the Relation Between the Uniform Electronic
Transactions Act and Federal ESIGN Act, Blockchain Technology and „Smart Contracts‟ (Feb. 11,
2019) (opining that state UETA provisions do not require amendment to enable use of blockchain
technology and smart contracts in electronic transactions).

41
with the U.C.C. policy that the ―writing‖ requirement is meant to assure that the
intention of the parties is manifest. Thus, courts have held, for example, that emails can
satisfy the U.C.C. ―writing‖ requirement. Smart contracts should be treated no
differently than other forms of electronic records. This is not to say that all smart
contracts, by definition, will satisfy the U.C.C. requirement. Just as an email may be
inconclusive as to what the parties actually intended, so too a smart contract may be too
vague. That said, given the objective nature of smart contract code and the parameter
certainty required to effectuate a transaction, most smart contracts for the sale of goods
or for leases should satisfy the U.C.C. ―writing‖ requirement, particularly if the parties
use an ancillary smart contract where the code just executes certain terms in the natural
language agreement.
A similar analysis can be applied under the statue of frauds. Under these state
laws, a valid writing need not be written entirely in natural language prose nor be
comprehensive. As with contracts interpreted under the U.C.C., courts have taken an
expansive view as to what can satisfy the ―writing‖ requirement under the statute of
frauds, focusing on the intent of the parties to create a binding agreement. Thus, terms
conveyed through e-mail or even types of telegraphic code can form binding contracts.
In addition, the writing under the statue of frauds generally need only contain the
agreement‘s ―essential terms‖ which can vary depending on the type of transaction. As
noted above, given the nature of smart contracts, the ―essential terms‖ (such as price
and what is being delivered) will likely be captured by the code itself. And, even if the
essential terms are not capable of being expressed in ―if-then‖ terms, smart contracts
can be used as ancillary tools to natural language contracts that include those terms.
The signature requirement
Both the U.C.C. and the statute of frauds require that a contract have valid
signatures to be binding. This requirement can also be satisfied when using smart
contracts. The U.C.C. specifies that a signature can be ―any symbol executed or
42
adopted with present intention to adopt or accept a writing27
.‖ Similarly, the statute of
frauds generally recognizes that a signature may be any symbol made by a party with
the present intent to authenticate a writing or contract28
. Courts typically look to the

intent of the parties and whether the signing parties proffered a signature with an
intention to authenticate the writing. Since smart contract transactions on a Blockchain
need to be affirmatively authenticated by each party using public
private key cryptography, a digital signature on a smart contract should constitute a
―symbol executed or adopted with present intention to adopt or accept a writing‖ and
satisfy the flexible signature requirements of the U.C.C. and statute of frauds. The E-
SIGN Act and UETA
The Electronic Signatures in Global National Commerce Act (―E-SIGN Act‖)
and state laws modeled on the Uniform Electronic Transactions Act (―UETA‖) also
provide important support for the concept that smart contracts should be treated as
legally enforceable agreements. Under each of these acts, electronic records and
electronic signatures used in interstate or foreign commerce transactions generally
cannot be denied legal effect solely because they are in electronic form. Although E-
SIGN is a federal law, and generally preempts state laws, individual states may
―modify, limit, or supersede‖ the E-SIGN Act if they adopt UETA or satisfactory
―alternative procedures or requirements.‖ UETA has been adopted by 47 states, the
District of Columbia, Puerto Rico and the Virgin Islands.
The key question is whether the Blockchains on which smart contracts are stored are
―electronic records‖ and therefore enjoy protection under these acts, and whether the
digital signatures used with smart contracts can be deemed protectable ―electronic
signatures.‖
Both the E-SIGN Act and UETA define electronic records broadly to include
any ―record created, generated, sent, communicated, received, or stored by electronic
means.‖ An explanatory comment to UETA indicates that this includes
27 U.C.C. § 1-201(37)
28
Restatement (Second) Contracts § 134; U.C.C. § 1-201(37).
43
any ―[i]nformation processing systems, computer equipment and programs . . . and
similar technologies‖ and any ―information stored on a computer hard drive.‖ There
should be little dispute that a Blockchain satisfies this broad definition since, at a
minimum, it stores records by electronic means. Moreover, at least one court has
suggested that a database is an electronic record under UETA, providing important

guidance given that a Blockchain is an encrypted and distributed database.
The E-SIGN Act and UETA also define electronic signatures broadly. Under both acts,
an ―electronic signature‖ includes any ―electronic sound, symbol, or process attached
to or logically associated with a record and executed or adopted by a person with the
intent to sign the record.‖ Moreover, UETA expressly states that this definition
encompasses a ―digital signature using public key encryption technology.‖ As with the
statute of frauds and the U.C.C., a digital signature based on asymmetric cryptography
that is used to sign a smart contract should meet the E SIGN Act and UETA definition
of a legally valid electronic signature.
The E-SIGN Act and UETA also include an additional concept that supports the
enforceability of smart contracts. Under these acts, an agreement cannot be denied legal
effect because the parties used an ―electronic agent‖ which each act defines to include
a ―computer program or an electronic or other automated means used independently
to initiate an action or respond to electronic records or performances in whole or in
part, without review or action by an individual.‖ Smart contracts which run self-
executing code agreed to by the contracting parties would seem to fit squarely within
this definition. The comments to UETA also contemplate the possibility that electronic
agents could conduct transactions with other electronic agents or autonomously, which
could occur as smart contracts and artificial intelligence continue to develop.
In order to rely on the foregoing protections of UETA, the parties must first
agree in a non-electronic writing that they will conduct all or part of a transaction
electronically. Thus, one party could not implement a smart contract without the
express written consent of the other party. Similarly, if a written record needs to be
44
made available to a consumer, the E-SIGN Act requires affirmative consumer consent
before an electronic record can be used, which consent can be withdrawn at any time.
The right for consumers to withdraw their consent at any time under the E-SIGN Act
may create operational complications given the self-executing nature of most smart
contracts.
As noted above, only 47 states have adopted UETA. Illinois (through the state‘s
Electronic Commerce Security Act), New York (through the state‘s Electronic
Signatures and Records Act), and Washington (though a state statute that recognizes
the E-SIGN Act as applying to state and local transactions) have each adopted their

SMART CONTRACT – ACHIEVEMENT OF BLOCKCHAIN APPLICATION, LOOPHOLES AND RECOMMENDATION FOR VIETNAM

SMART CONTRACT – ACHIEVEMENT OF BLOCKCHAIN APPLICATION, LOOPHOLES AND RECOMMENDATION FOR VIETNAM

Recommended

Recommended

More Related Content

Similar to SMART CONTRACT – ACHIEVEMENT OF BLOCKCHAIN APPLICATION, LOOPHOLES AND RECOMMENDATION FOR VIETNAM

Similar to SMART CONTRACT – ACHIEVEMENT OF BLOCKCHAIN APPLICATION, LOOPHOLES AND RECOMMENDATION FOR VIETNAM (20)

More from lamluanvan.net Viết thuê luận văn

More from lamluanvan.net Viết thuê luận văn (20)

Recently uploaded

Recently uploaded (20)

SMART CONTRACT – ACHIEVEMENT OF BLOCKCHAIN APPLICATION, LOOPHOLES AND RECOMMENDATION FOR VIETNAM