Author: Mohamed Hamza Ghaouri
The era of incomprehensible contracts written in legalese by lawyers in fancy suits is over. The contracts of the next century will be hybrid smart contracts, written in code by programmers from the new generation. So, what is a hybrid smart contract?
Before talking about Smart contracts, it is important to introduce the underlying technology that support the execution of these contracts. The blockchain. Blockchain is a new variant of distributed ledger technology. Where the ledger is distributed to a group of participants in the network. This technology has the potential to disrupt different sectors finance, supply chain, real estate and many other industrial as well as legal fields. It has shown its effectiveness in improving existing business processes, as well as improving the efficiency of existing transaction systems. With blockchain, we can imagine a world in which contracts are included in digital code and stored in transparent and shared databases. These coded contracts are called smart contracts.
Smart contracts are self-executing contracts, written in codes and executed by the blockchain. These smart contracts are great at sending and receiving funds and perform complex calculations or generate random numbers on their own. The transparency and traceability of provided by blockchain and smart contracts make the platform almost immune to digital scams, and fraud. However, the main limitation of smart contracts is that they cannot access the data off-chain. This limitation prevented smart contracts from fulfilling many of the roles that traditional legal contracts currently hold. Hence the development of a new generation called hybrid smart contracts.
Hybrid smart contracts combine codes executed on the blockchain (on-chain) with data and calculations outside the blockchain (off-chain) provided by decentralized Oracle networks. In other words, hybrid smart contracts are able to source off-chain data and execute it in the blockchain network. Hybrid smart contracts enable advanced forms of economic and social coordination that have the tamper-proof and immutable properties of blockchains to any data source or real-world system. A hybrid smart contract has two main components:
- Smart contract
- Decentralized oracle networks
The ability to access off-chain data through decentralized oracle networks enables smart contracts to perform more complex computations. Off-chain data provided by oracle networks can help smart contracts perform more tasks, whereas previously, they were limited by code on the blockchain.
The idea of self-executing contracts is not new to the legal profession, but the technology now exists to make them more universally available. The transparency available in smart contracts (and therefore hybrid smart contracts) is unprecedented. The blockchain code cannot be changed once deployed and transactions are stored permanently Unlike traditional contracts, hybrid smart contracts are enforced by blockchain, which means there is no need for an external court system to enforce contracts. The enforcement of traditional contracts by the courts is not only expensive, but also introduces uncertainty into the outcome. Without an expensive court system, contracts are cheaper, so more peer-to-peer transactions can be governed by contracts rather than trust. The deployment of a hybrid smart contract allows contracts between companies located in different countries to be executed easily by removing the challenges of the traditional system of the days when a country’s judicial systems have limited power over the companies of ‘other countries.
Having said that, I have a strong believe that the legal intervention in the financial system will decrease especially in the execution phase of the contracts. However, a legal advisory and foundation is crucial to build contracts that will be subsequently coded and executed. Accordingly, Finterra built a transparent and self-executing smart contract that operates based on legal and compliant basis. Its capabilities extend to more than just the technology build itself as Finterra itself provides advisory services on blockchain, technology regulations and Shariah advisory through its expert partners.