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  • Writer's pictureReinhard Lindner

Smart Contracts, AI, and Lawyers

Smart contracts are becoming popular in the software development market and among various industries. These are the digital programs that automatically execute, control and document the terms and conditions of an agreement between the two parties. Using blockchain and AI technologies, smart contracts become more efficient, accurate, and adaptable. With smart contracts, it is possible to achieve high levels of security, transparency, and automation. Do we need lawyers then? Would smart contracts substitute human experts? Sencury has an answer for that.


How do Smart Contracts Work?

Smart contracts change the way of implementing and enforcing agreements and contracts. Now they are decentralized, secure, and automated. Nonetheless, how do they work?


The procedure looks as follows:

Smart contracts are blockchain-powered self-executing programs. They are built to provide automatic enforcement of different rules and regulations based on a particular agreement or contract. It means there is no need for intermediaries e.g., lawyers and other third parties.

Smart contracts are blockchain-powered self-executing programs. They are built to provide automatic enforcement of different rules and regulations based on a particular agreement or contract. It means there is no need for intermediaries e.g., lawyers and other third parties.


Everything starts from the identification of an agreement, where the parties involved identify cooperation terms and conditions and the desired outcome. Then, smart contract conditions are set.


Containing the terms and conditions of a concrete deal and the rules of execution, smart contracts are written in code and are stored on a blockchain network, where they can be accessed by everyone involved.


Automatic validation and enforcement of the contract terms are done via the blockchain network. Blockchain technology makes this process transparent, immutable, and secure. Therefore, it is difficult to alter or manipulate the contract without being detected.


Also, there are network updates. Here, all the nodes update their ledger.


AI in Smart Contracts

AI can enhance smart contracts in a number of ways. It brings both intelligence and automation into the process of decision-making that is core in smart contracts. For example,


Oracles

Oracles, or specific data feeds, take data from off-the-blockchain data sources and put this particular data on the blockchain for smart contracts to use. Oracles are powered by AI, which allows them to collect and analyze real-time data from various sources. I.e., IoT devices, social media, or financial markets. The data obtained is used to prompt certain actions within the smart contract or initiate the decision-making process on the information that has been previously analyzed.


Risk assessment

The other brilliant way to be on the safe side with smart contracts is to use AI algorithms for risk assessment. Historical data and related patterns are the basis for AI models. The latter identifies potential risks, predicts outcomes, and recommends appropriate actions. Industries such as insurance, lending, or supply chain might benefit from using AI in the mentioned cases.


Dynamic changes to terms and conditions

Using AI capabilities, smart contracts can adjust their terms and conditions based on changing circumstances. E.g., an AI-powered smart contract in a supply chain or any other industry can dynamically adjust pricing, delivery schedules, and other conditions based on the current market state.


Resolution of disputes

AI is an assisting tool in smart contract disputes. It helps to analyze the terms of the contract, the history of transactions made, and all the data within the contracts that might resolve any problem occurring. Therefore, AI algorithms offer automated dispute-resolution mechanisms. Hence, all the stakeholders involved will save time and costs that would have been wasted during the traditional dispute resolution procedure.


Contract optimization

AI is the number one tool to learn from past experiences and avoid repeating problematic occurrences in future contacts. It easily identifies negative patterns and trends that might be improved. In addition, AI suggests what improvements might help in a particular case. I.e., AI recommends the best contract terms, resource allocation, and risk management strategies.


Can Smart Contracts Substitute Lawyers?

With all the features and encryption benefits that smart contracts can offer; it is still highly unlikely these self-executing programs will substitute legal experts. The main reason lies in the limitations smart contracts possess and their inability to replace lawyer expertise and comprehensive legal guidance.

Lawyers are needed to support the following legal procedures:


Complex legal matters

There are contracts that include various complex nuances and regulations, which cannot be executed by smart contracts. The latter requires predefined conditions. Therefore, lawyers are the main sources of expertise that will provide legal analyses, advice on different matters, and interpret contract conditions even better than the smart contract is able to.

Legal counsel

Lawyers also provide legal advisory customized to any existing case. To protect the client’s interest, a lawyer would assess the possible risks based on the terms of the contract, negotiate according to certain agreements, and many more. Concerning smart contracts, they are unable to understand the contexts of the legal documents, negotiate terms per need, or provide custom pieces of advice.


Contract formation

Smart contracts are the executors. However, if you need to draft the possible terms and conditions of a legal document, unfortunately, smart contracts will not cope with the work. They only automate and execute things that are established. Lawyers, in their turn, can provide drafts, ensure legal compliance, and customize client needs to meet business or personal requirements.


Dispute resolution

Smart contracts use AI to better resolve disputes within their terms and conditions. However, if the problem is complex and requires proceedings and advocacy for the client’s rights, no matter how smart a program is, it has limits. Hence, a legal IT lawyer carries out duties this self-executing software cannot. For example, lawyers have the needed skills and experience to navigate the legal system, engage in negotiations, and pursue litigations.


Legal framework

A lawyer is a person who studies the legal market with its evolutions, new regulations, legislations, and judicial precedents shaping the interpretation of contracts and legal rights. Lawyers really update their knowledge to provide up-to-date services. Smart contracts, in their turn, cannot adjust to changes on their own. They need a particular input. However, even with the input, new conditions require human expertise to process them rather than a program that bases its knowledge on outdated artifacts.


Sencury’s Answer on Smart Contracts, AI, and Lawyers

Smart contracts are one of the many great ways to establish partnerships, set business goals, and define particular rules. Moreover, these self-executing programs will ensure all the terms and conditions are being met precisely. Adding AI to power smart contracts is a good investment, especially with NLU capabilities. AI can automate legal procedures and provide great knowledge-sharing on negative contract patterns, resolve minor disputes, and offer transparency and efficiency.


Notwithstanding the benefits smart contracts’ AI has, there are situations and legal disputes, where the skills and experience of a human expert are a necessity. That’s why lawyers are greatly valued in the software development market. Smart contracts cannot substitute lawyers as the program is unable to think outside its input measures, at least before hypothetical artificial general intelligence is developed.


We shape our agreements according to current laws and regulations of the software development market. Therefore, we possess the skills and knowledge needed to guide clients in the intersection of legal and technology matters. Sencury’s most common technological stack to build smart contracts is Solidity on top of the Ethereum blockchain.


Contact us to receive an extensive consultation on Smart contracts, AI integration into smart contracts, and why you need to have a lawyer when signing digital contracts. Our consultants will provide answers to your questions and many more.

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