Dr. Khanh Dang Ngo - Improving Smart Contracts with Civil Code

Thank you much. I am. I'm very honest to be here today to speak to you and copy a code has been so great to me personally, and the event I have significance, not, not only with why, especially in Frankwood. So it's a great pleasure for me to talk to to you today. I am by person. I am conflicted. I was born in June, so the Zo is Gemini. I have two faces, but the confliction is not only personal. It is in discipline. I'm a FinTech lawyer with the British law and Simmonds, and Simmonds so the conflict of the discipline is on one hand the law on the other hand, the code or technology per se.

So today, when we talk about smart contracts, the prevailing questions always, how do we do smart contracts apply to the law today? I want to switch tides the other side of myself and ask how could the law implemented to improve the technology? So this is the, the title of my presentation today, improving some contracts with serial and the basic two questions. This why smart contracts. So what problems discuss, do smart contracts try to solve, and what problems does it not solve? So why smart contracts and where not to smart contract.

And I would conclude with a small summary, why smart contracts start with an issue? And the issue is it. We have a separation of formation of contract and the execution of the services being readable. So we divide version formation, you enter into a contract, and then the law says, you are basically free to perform or not to perform. If you don't perform, then the law steps in and you have what we call a secondary law. You have damages, you have breach of contracts.

You have provisions that exposed are implemented to do something that we perceive as being just, but the problem with the separation is that it is perceived to be inefficient. So meaning when I sell my, my laptop to perform, I have to give transfer the immediate procession of the laptop of mine. So we have the entering for agreement and we have to performance of disagreement in payment services. This usually takes several times, several days to perform several days to execute. And this is being perceived as an efficiency.

So formation per se, does not automatically mean that the services are being performed. The second problem that we have, especially in cervical countries is For land registry. If you trans transfer something, that is where of very important for the society the society says, or the government for, for that instance says that you need to have a third trusted party for when I transfer to my, my property, if I had one, so this would need to be recorded on the registry by the third trusted party takes time. This is inly.

So the proposal is that we have everything that we have in our analogs time, the contract transmitted into digital digital, to assets. So digital, I'm sorry to units. The traditional contract basically has two elements.

One, we, the provisions, the declaration of intent of two or more parties and the pay card that the provisions are written up. When we translate this into smart contracts, the provisions are the code and the code is written on blockchain or on the PTO P network. So a definition, and this is very important for our lawyers. There is no such as one definition of a smart contract, depending on who you ask, you have different definitions of a contract, but most of the definitions have in common that they basically have two elements. The one being that the provisors are self executed and forced.

And the second one being that it is written on the medium, in our case, this would be the blockchain. The concept of smart contracts has been evolving over time. This is not a new idea of the new generation. It is basically the concept has arrived in 1994 by a paper on the internet introduced by crypto example, but the concept itself of an automatic self-executing and enforcing contract, we made unrealized because the technology infrastructure does not exist when it was with blockchain technology.

With the combination of a bundle of technology innovations, it became possible to implement the idea of digital contracts or smart contracts. And in the words of Nutanix butchering to develop of the film network, this is to say that smart contracts are generally defined as cryptographic boxes that contain value and only unlock it with certain conditions. And something that injected into this discussion of smart contracts is, should be highlighted here. It is the value.

When you implement something in a smart contract, you are capable to transmit and transfer this value, whether this be information about yourself, your identity, or the contract that you want to agree upon service, the payment, whatever it is that you agree in a smart contract, this is a trans transmission of event. I think it's very fascinating because when as a contract lawyer, contracts are always performance and, and services, services, and conservation. I receive some services in, in connection with consideration.

My contracts per per definition have been, needs to be divided into basically two boxes, the one focusing on the code itself. So whenever conditions are been met, then whatever you have written on the code is being performed and executed. But from a C code perspective, a, a contract is something more when Mike and and myself agree on the contract, it really depends how we translate this into, into one contract. When we talk about the laptop, then we need to define what laptop, right? We talk about consideration. We need to define currency. We need to define the time.

And the law says should define this, the conditions of the contract by looking to the context of the agreement. It's not only what is written into the agreement. It is important. It's also the context that that needs to be interpreted. And the reason for that is that the law tries to have a just outcome of the agreement's not only that we exchange decorations of intent. It is the meeting of the minds that needs to be interpreted. So when we talk about contract, in the sense of smart contract, we talk about smart legal contracts.

We talk about a code contract in, in addition to context, that makes the smart contract complete in the legal sense. And here you see the confliction between, when we talk about smart contracts on the blockchain. On the one hand, we have a very coded based understanding. On the other hand, we have a very based understanding of smart contracts and for a conflicted person. This is a very happy to, to see that the confliction between code and law goes beyond smart contracts, per se, but you can divide this.

If you have the metrics and you look at what is the law and what Is the code, you basically can dissect every, every contract smart contract. So on the one hand, you have these contract terms upon the events who would have a transfer of value, whatever value you would like to transfer. And then in addition to that, you would some tools that the, the law provides to you, either to remedy for notification classes, have some reps and warranties in the real world implemented to you.

And the law that is in the context of the small contract, a lot of use cases have been developed and thought about I myself, as a trained captain markets, lawyer have been looking into certain coins, but also should shine, darling, securities loan, all the, the loans and, and contracts that are implemented in the real world can be digitized and represented as a smart contract. This is not a problem. If you have all the conditions that you need to, and if you know what the outcome should be.

So basically from, from my experience, I do believe that most of the standardized contract and financial markets can be represented by smart contract. And the market speaks about 85 to 90% of the standardized pro agreements can be programmed as smart contracts, but here are a few examples how to use smart contracts on financial markets. The only issue that we have if you program something on blockchain is as long as it stays in the hemisphere of the blockchain, as long as it stays digital, without crossing the border to real life, crossing the border to real assets, we are completely fine.

But as, as soon as it steps over the code steps over to the real world in real world effect, then the loss needs to step in because it's the framework that the smart contract code touches. Then one example I, I usually discuss is the deriv trading or with the clearing and settlement is very, I think illustrative because you have different measures, smart contracts, per se. If you look this in a two dimensional way as conditions met and then performance are executed automatically, then there is no problem solved by now. We can already represent us with the techniques that we we have at hand.

But when we combine different S when we transfer not only the securities, we automatically transfer collateral, the payments and the assets. Then you would have a multidimensional asset transformation. And this is where the benefit of smart contracts on blockchain line. One premise is that you already have the infrastructure and this way out the financial market struggle right now, you don't have the infrastructure to, to intervene or to trust the line between the, the silo space and the real life assets.

But when this happens, when you have an asset backed by a Fiat money, backed by central central emo or central crypto currency, then you would have this conjunction between the cyberspace and the real world as a, as a lawyer, we are technology agnostic. So, and as a lot, we tend not to be able to look into the future. But when we look into the past, we have been often surprised how other architectures prevail and, and can amend the law that we know right now.

So the second step is this was wise smart contracts to make contracts more efficient, to, to overcome the separation between formation and performance, to be faster, more secure, because you don't need a third transfer party and to do something that the law does not provide to have execute a huge rule. So what is the problem? We are not to smart contract?

The problem is, is exactly this, the benefit of a smart contract, the automation of the execution, the no tolerance policy can have outcome that in the real world is deemed to be in just when we foreclose something foreclose the mortgage, because a family cannot cannot pay just for one month or two months. Then policy needs to step in policy needs to understand the outcome of the, of the enforcement. And there are various of fact patterns that the law established, right. Says whatever you have agreed upon on your commitment. It seems to us that it is not just if we enforce this.

So it is not like code. It is not one plus one is equals two. Sometimes one plus one can equate to in a later state. It could be, it could be just if we legalize the default, it could be just if we can the agreements, because we found that the fact patterns have changed, and this is the basic element of the human being. And I will clarify why we have incomplete contracts later, but it is important that we have here, the conflict of both principles, the one principle being binary 1 0 1 0, and the other one looks at the human relationships.

What does, does it mean to be a, just to be in a adjust relationship? So the problem of smart contractors that the code indicates through, and here we have the competing set of, of fluids on the one hand, the code, which is the architecture of our human behavior. When we enter into contract, we are obliged to execute. And on the other hand, the legal framework says, okay, you are, you, you, you have to perform when you agreed upon something, but in certain circumstances, there are exceptions to that.

We have upon defense, we have certain defenses where we, where have the law as a framework says, okay, let's talk about this. And let's think about the outcome of the so in contact theory is that the basic issue of the basic issue of smart contracts is that the separation of formation and performance is inefficient. But on the other hand, new contract theory, we assume or safe stage that in incomplete contracts are not efficient, inefficient. They are very efficient because we agree upon the basic elements of the contract.

When, when Mike and I agree upon the, the sale and purchase of my laptop, Mike is interested to receive my laptop. I am interested to receive the consideration and he looks like a very nice guy.

And, and I trust him to give him consideration. So the basic human interest is to have a transfer of assets. But for instance, if, if Mike have some misconceptions of the, of my laptop being, not being an apple or not being a PC, then he have the right to cancel the, the agreement because the, the premises where he came from in entering the agreement would justify that precancer the agreement, because he has a misconception of certain material elements of the purchase subject. So designing contracts, this is something that smart contracts can step in.

As long as we know the Conditions, for instance, we see the transactions, we have all the, the, the conditions standardized. We have also standardized the outcome of the contract. So this is something that we can code into small contracts. What we cannot code is all the secondary, what we call the secondary law, the remedy and implication cases, where the law needs to step in to provide a just outcome. And of course, in context transactions.

But I attempt to believe that as if we observe the development of smart contact, longer smart contracts tend to be capable to, to perform more and more complex transactions to interpret this into the law. It is basically, it comes down to, to the Ary clause of good faith. The clause of good faith says that obligor has the duty to perform according to requirements of good faith and what the requirements of good faith is, is being stipulated and figured out by court decisions by discussions between human beings, by settlement agree.

And from, from that, from the good faith defense, you would have different, I'll say principles of the law that needs to be implemented into small contracts. If you want to have a complete small contract, one of them would be interpretation of declaration, of intent to cover up misconceptions that might have the, at the time when the parties entered into the contract, something that I find very fascinating is the provision do not do know harm and do know harm.

The concept of do know harm has been favored in the, the doubt incident that although the code has been implemented, provisions that have been executed correctly, the developer stepped in and changed the code. So they changed the, my time. They changed the code. And so they changed the rule of the game. And this is something that we lawyers call. They do not harm provisions, which is implemented in the civil code.

So, so to sum up is the, the issue as my contracts try to address is the inefficiency or the perceived efficiency of contracts, the separation of entering into a contract and performing this contract, the, the not synchronizing the performance with the, the entering of the agreement, but this also is the weakness of smart contracts, but contracts per se, by finishing Are by default can be injust. And this is where the, the law has in. So to conclude, we would have a conflict between two disciplines and the outcome of this could be twofold.

The one would be either one of them or both of them merge together and attend to favor the second, please. Thank you.

Thank, thank you very.