WHAT IS THE BLOCKCHAIN CONCEPT AND SMART CONTRACTS? WHAT ARE ITS LEGAL EFFECTS? 28 September 2020

1. BLOCKCHAIN CONCEPT

Digital transformation, which has developed rapidly in recent years and started to show its effect in every field, has also been the harbinger of many innovations in the legal field. At this point, the place of blockchain technology and related smart contracts in digital transformation processes is of particular importance.

Blockchain is a distributed database that provides the management of encrypted data on a network that is protected against security breaches and easily accessible. In the blockchain system that eliminates the central establishment, a central authority such as Google and Facebook disappears, everyone participating in the network connects and the validity of transactions can be verified by everyone. The most important distinction in this context is whether the blockchain network is public or not. The best-known example of blockchain networks where participation is free, in other words, open to everyone, is "bitcoin cryptocurrency". Besides, there are private or public blockchain networks where the participation conditions are determined by a person or institution and certain conditions for participation can be sought. The realization of public services such as population and title deeds over the blockchain network can be shown as an example of such blockchain networks.

The main features of the blockchain system can be summarized as follows:

• Unchangeable Data System: Blockchain technology has the characteristics of a registry that records data in an encrypted form and where all encrypted information is shared with everyone involved in the system. Transactions made in this registry are recorded in blocks, these blocks are linked with each other, and for each new transaction to be confirmed, it is required that the information on previous transactions be kept unchanged.
• Having a Distributed Structure: Although there is distributed data in the blockchain network, the data is not recorded and processed in a central place, on the contrary, it is distributed to all participants.
• Transparency: In blockchain technology, the history of the records can be followed by everyone.
• Transaction Reliability: Blockchain technology is considered to be a technology that eliminates brokerage houses, offers equal opportunities to every participant, and is almost impossible to manipulate.

2. SMART CONTRACTS

Smart contracts were first described by Nick Szabo in 1993 as "a computer-operated transaction protocol that fulfills the terms of a contract." With the advent of blockchain technology, it has been understood that the blockchain system is an ideal technology to support smart contracts and the development of smart contracts has accelerated. These contracts promise to replace conventional contracts without central control in a reliable environment.

Accordingly, if the blockchain chain is considered as a distributed database, smart contracts can also be expressed as applications that can transact with this data. Although they are not directly linked to contracts in legal terms, these programs, called smart contracts, consist of program commands that will execute the transactions they have previously agreed on the accounts included in the contract. Smart contracts have an address like the addresses of the accounts on the blockchain, and once included in the blockchain, they cannot be changed. The role they can play in process automation is enormous, as they contain commands that can be processed automatically by the machines included in the blockchain when the terms of the contract are met.

If it is explained with an example; in the example of a smart contract that includes commands for the rental of a vehicle operating with a smart lock, the parties to the contract are the account of the person who wants to rent the vehicle and the account that owns the smart lock. When the contract is agreed, the rental fee is transferred from the account of the person who wants to rent the vehicle to the contract and the smart lock is turned on. When the contract expires, the amount previously transferred to the contract is transferred to the account that owns the smart lock and the lock is turned off.

3. THE LEGAL EFFECTS OF BLOCKCHAIN TECHNOLOGY AND SMART CONTRACTS

• Some Problems That May Occur in The Application of Smart Contracts

Due to their nature, it is not possible to use and interpret smart contracts synonymously with traditional legal contracts under all circumstances. In real contracts, parties may agree to withdraw from the contract if they wish, or fail to fulfill the contract and then have a chance to defend themselves in court. However, it is not possible to change smart contracts or prevent them from being implemented. Therefore, it may be safer to use smart contracts in application areas that currently affect routine and short time frames.

Smart contracts eliminate banks, notaries, and similar third parties, thus providing significant advantages in terms of cost, speed, and security. However, since all transactions in smart contracts are carried out electronically by computer systems, it may be possible for the system to become completely or partially inoperable in cases such as communication problems, software errors (bugs), viruses, network attacks.

Besides, non-measurable terms and conditions can often be included in traditional contracts. In this context, traditional contracts should be modeled and coded according to smart contracts to be represented and operated by computer systems.

• Areas Where Smart Contracts Can Benefit in Practice

Some of the areas where smart contracts can be useful in case of use are:

- Supply Chain Applications: In case of using smart contracts in these applications, it will be possible to provide automation as well as transparency and security.

- Internet of Things: Currently, studies are conducted on research topics such as blockchain-based smart homes, smart cities, and smart transportation. In case of the use of smart contracts in this area, IoT technologies will become more effective, more autonomous, and more automatic.

- Health Practices: Blockchain technology is useful in patient privacy, information storage, and protection of personal data.

- Insurance Practices: Traditional insurance solutions have uncertainties and long results. If the integration of smart contracts is achieved by eliminating the uncertainties in the processes, very fast and transparent results can be obtained without the intervention of a third party.

- Finance: Smart contracts can be used in many financial areas such as checks, loans, and leases due to their structure.

- Real Estate Practices: Traditional real estate systems involve time-consuming and risky processes. Besides, due to legal requirements, there are also obligations such as paper waste and a wet signature. Thanks to smart contracts, trading can be made without the need for a third-party institution intermediary, and transactions can be transparently stored in digital ledgers.

- Copyright Applications: Products containing copyright may require different payment terms. Using smart contracts can be useful in such applications.