Hunit - Smart Legal Contracts

Unraveling Web3 mania: do Smart legal Contracts really need blockchain?

For the Web3 community, it seems like a rhetorical question hardly worth consideration.

The issue is that Smart Legal Contracts (SLCs) are one of Web3’s great breakout use cases. From the birth certificate onwards (or a company’s formation documents – i.e. their birth certificate) nearly every aspect of life is defined by legal instruments. SLCs have the ability to bring Web3 technology to more people and more companies than virtually any other use currently imaginable.

While legal services, enterprises, SMEs, and the greater population all interact many times per day with web services, they nearly never (on average) do so with Web3 or blockchain. To them, the question isn’t rhetorical at all.

So, what do we get with Web3 (aka distributed ledger technology or blockchain) that we don’t with the web service platforms that run every other aspect of my digital existence?

As the leading supplier of legally compliant SLC technology – we think SLCs need Web3, here’s why:

Practicalities

Persistence

Legal agreements need to last, sometimes a very long time. The current gold standard for the persistence of a legal agreement is parchment paper – bonds issued on it in 1624 by the Lekdijk Bovendams water board in the Netherlands are still paying €15 per year in interest. On the day they were issued, the son of Mary, Queen of Scots (James I) was king of England.

A decentralized ledger exists as long as some entity (preferably a plurality of entities) maintains a version of it, even if a company like Hunit ceases to trade. If the lawfirm that wrote a modern equivalent of the Lekdijk Bovendams bond (or the law firm’s successors in interest) continued to maintain a version of the ledger indefinitely, a digital bond would have an equivalently long lifespan. Its arguable that its external data connections (such its banking integration) would cease to function over time, but Hunit’s approach to SLCs is based in natural language, partly because using natural language to agree upon the intention of the parties, (rather than the use of explicit code syntax which only captures the agreed mechanics) allows for an SLC to be periodically rectified by its parties over time as technical environments evolve. Our view is that a legal agreement exists for the benefit of its parties – putting the continued cooperation of a third party into the mix adds an undesirable externality.

Indelibility

It’s hard to overstate the impact of indelibility and its consequence, legal certainty. The moment the accuracy of a legally significant record is brought into doubt, litigation over the facts of a case ceases and litigation of the facts commences. Any single-party managed record will always be subject to the lingering question of legitimacy – Web3 technology was precisely created to solve the problem how to enable trust between mutually suspicious counterparties that lack the unrealistic go-between of a ‘perfect intermediary’.

Security

Web3 networks are extremely difficult to breach (not the case for web services). Granted that the distributed ledger technology’s (DLT) code does not contain bugs, it operates using cryptographic techniques that represent the current (pre quantum computing) state of the art. With its use of sequential ‘hashing’ and an even moderately distributed ledger, attempts to modify the data of an SLC (either the agreement or its onboard record of execution) become immediately apparent and are autonomously rejected by the DLT network itself. In fact, a very large percentage of the underlying server platforms running a particular DLT network can be breached by the same bad-actor in a coordinated attack without compromising the security of the data and computational ability of DLT network running upon them – they are essentially operating on different layers.

Rivalrous-ness

The original use of DLT’s trust-enabling infrastructure was to create a digital objects that could not exist in multiple places at once. These digital objects (tokens / coins) are ‘rivalrous’ in that if I possess it, you cannot. As anyone familiar with information technology will know, it is nearly impossible to systematically prevent the proliferation of perfectly identical copies of an original digital file. Only Web3 technology can perform this task and, when used in the context of SLCs, this capability provides certainty over a) the one ‘true’ copy of a legally binding agreement existing between parties (very useful if litigation occurs) and b) digital assets it may manage (such as tokenized representations of shares, bonds, intellectual property rights, etc.)

Resilience

Resilience encompasses an SLC’s operation as a self-executing legal agreement rather than its simple existence. Short of shutting down a Web3 network entirely, which would require neutralizing every node within it, an SLC will always be capable of executing upon its underlying code elements regardless (or in the face of) attempts to stop it. A web service on the other hand can be turned off for any number of reasons, some as simple as the service provider forgetting to pay their cloud computing bill. As with persistence, making the ‘self execution’ part of a self executing agreement dependent upon a third party is a deeply undesirable externality in a bilateral legal relationship.

Liability avoidance

For the reasons mentioned above about security and indelibility, we presume that a single-party managed web service for SLCs would be subpoenaed, questioned or sued in a non-trivial percentage of litigation. Using a DLT-based approach offers a structural pre-emption to many such eventualities.

Ideologies

Private, bilateral relationships

Privacy levels vary by DLT protocol, but the Hunit’s selected protocols provide a high fidelity replication of the how law is practiced today – agreements are private between their parties until and unless a party divulges (or is compelled to divulge) its contents to an external party. Hunit leverages the encryption built into a DLT network to keep an SLC’s data and its execution logs exclusively private to its parties and their appointed observers. As we know from frequent news articles, web services are routinely breached or used by their rightful owners for purposes that exclusively benefit them. Any external review of a legal agreement should only be possible with the express consent of one or more of its parties (or a court of law).

Ownership of digital identity

DLT potentially serves multiple functions within an SLC, including management of what is known as ‘self sovereign’ digital identity. We believe that private, bilateral relationships can only wholly exist when the subject of a digital identity is also its exclusive owner and manager. In this context, this means that your KYC/AML documentation, additional accreditation, what SLCs you have entered into and what actions you have taken within them is data that is exclusively visible to you. External review of this information (or parts of it) should only occur when explicit permission is granted. We know of no example of a web-service based system that structurally fulfills these goals – a company operating a web service may operate it in such a way as to fulfill these goals, but they would always have the power to change their mind in the future.

Decentralized approach to a decentralized sector

Law is, by its nature, a highly decentralized sector. Large numbers of legal professionals provide services to an even larger number of clients which interact with one another via a preposterously large number of legal instruments. Our view is that changing the core nature of a sector is a significant challenge for any technology. We believe that a DLT network used by legal professionals to create and record legal agreements for their clients should be treated as common infrastructure where each firm has the equivalent interest in maintaining its integrity on behalf of their clients using it.