The first legally and judicially enforceable contract on Cardano has been signed, fully compliant with the laws of the Argentine Republic. Integrating blockchain technologies with traditional legal systems is crucial for the broader adoption of cryptocurrencies. Countries’ legal systems vary in their readiness for blockchain transactions and smart contracts. Argentina has once again demonstrated its openness to adopting cryptocurrencies and Cardano.
Contracts vs. Smart Contracts
A contract is typically formed between two entities that make mutual promises. If one party fails to fulfill its obligations, the other party can seek redress through the legal system.
Contracts are usually drafted on paper and must include basic information, a description of the agreement, and, most importantly, the signatures of all parties involved.
A smart contract can act as an intermediary between two or more entities that may not trust or even know each other but still need to interact in a trustworthy manner.
As a trusted and impartial intermediary, a smart contract performs exactly as programmed. All parties can rely on the smart contract deployed on the blockchain to act honestly and impartially.
However, smart contracts cannot understand or interact with the physical world. While Oracles can reliably deliver data from the physical world to a smart contract, enforcing the contract without a legal framework is not possible if someone violates it.
In the digital realm, smart contracts can operate reliably without a legal framework. For example, if Alice and Bob want to exchange two types of tokens, such as ADA and HOSKY, in a pre-arranged ratio, the smart contract ensures that neither party can be cheated.
A common issue with token exchanges is that the first sender risks the counterparty not responding and not sending the promised token, leaving one party with both tokens while the other has nothing.
A smart contract resolves this problem by acting as a temporary custodian of both tokens. Once it holds both tokens in the required amounts, it performs the exchange. If one party decides not to send its tokens, the smart contract expires and returns the tokens to the party that locked them in.
In this scenario, a smart contract can effectively replace a traditional paper contract. Participants can securely exchange not only ADA for HOSKY but also, for example, tokenized gold for stablecoins. Decentralized exchanges (DEXes) can reliably facilitate token swaps between supply and demand.
For a smart contract to facilitate more complex interactions, such as loans, without relying on a legal framework, an adequate solution is necessary. For instance, if Alice wants to borrow 10,000 ADA from Bob and promises to repay it within four months with a 10% bonus, it’s crucial to ensure Bob doesn’t lose his ADA. One solution is for Alice to lock digital assets into the smart contract as collateral, which Bob can claim if Alice defaults on the loan.
In this scenario, there’s no need to depend on a legal framework, but Alice must provide digital assets of equal or greater value than the loan amount to lock into the smart contract. This requirement can be a significant barrier, especially if Alice is from a developing country and lacks other assets, making it impossible for her to secure a loan.
A Legally Enforceable Contract
A legal framework ensures that if one party breaches the contract, the obligation is legally enforceable. This framework can replace the need for collateral, allowing Alice to take an unsecured loan from Bob. If Alice defaults, Bob can legally demand repayment.
This scenario recently occurred in Argentina, where a paper contract was signed for a loan facilitated by a smart contract. The loan, between Mauro Andreoli and Lucas Macchia, involved 10,000 ADA, repayable in four months with a 10% interest rate. The transaction was notarized with the Transaction ID.
Thanks to the legal framework, any breach can be enforced in court, ensuring the obligation in the ADA is met.
Details such as network type (Cardano), wallet information, and the Transaction ID of the loan agreement are crucial in the paper contract.
This is undoubtedly a significant advancement. Legally, it establishes evidence and streamlines procedural steps, marking the initial phase of creating favorable jurisprudence in the country and facilitating commercial transactions.
Thanks to blockchain technology and the legal framework, digital interactions between two participants can occur without traditional financial services. When fulfilling the contract, it’s essential to secure evidence of the transactions. One party must prove it provided the ADA, while the other must demonstrate it repaid the loan in several transactions, including the promised bonus. Cardano’s ledger acts as a trusted record of these transactions between the contract participants.
If the agreement between the parties is violated, the authority can easily determine which transactions occurred and which did not.
A paper contract may seem redundant alongside a smart contract, as both parties had to sign a paper contract before interacting through the smart contract, necessitating a face-to-face meeting.
In the future, digital signatures could be used on digital contracts, with their hash and URL linked to the smart contract or the initial transaction. Both parties could review the digital contract in advance. A smart contract could even verify a digital signature or identity if a Digital Identity (DID) solution is available.
This would make the interaction between participants entirely digital, with the legal system only needed in case of a contract breach.
With the support of the legal system, real estate or other physical assets can be used as collateral in a smart contract. This will significantly expand the usability of smart contracts.
I believe that smart contracts represent the future of interactions between entities seeking to engage digitally through a trusted intermediary.