In our increasingly virtual reality, things like the metaverse and blockchain technology have bled into all areas of our lives ranging from entertainment to transportation and even the most mundane things like contracts. What was once a written or verbal agreement between two parties, the contract has now gone smart. As the real estate industry continues to adapt to new and augmented realities, we predict that smart contracts will not replace traditional contracts any time soon.

A smart contract, like any contract, establishes the terms of an agreement. But unlike a traditional contract, a smart contract’s terms are executed as code running on a blockchain. Blockchain operates as a digital database or ledger, containing information that can be permanently recorded, used and shared within a decentralized, publicly accessible network. It is often used for the tracking and trading of cryptocurrencies and non-fungible tokens.

The blockchain’s code runs when predetermined conditions are met such as automating execution of an agreement without third party involvement.^[1] Smart contracts work by following simple “if/when…then…” statements written into code on a blockchain. This code defines the rules or provisions governing the transaction. At present, smart contract capability is limited to simple tasks such as releasing funds or imposing late fees after a triggering event.^[2]

Currently, smart contracts are unable to account for the nuances in real estate transactions. Complex commercial transactions will continue to require text-based contracts to determine subjective triggering events such as substantial performance or cure of default. These subjective events often require additional information outside of the smart contract parameters to make a decision or reach consensus to satisfy a condition. Oracles, not unlike escrow agents, can be used to integrate a smart contract with a traditional contract. They are trusted third parties that retrieve and verify outside information before pushing that information to the blockchain at predetermined times. Essentially, a blockchain Oracle bridges the information gap between the blockchain and the external environment, creating “hybrid smart contracts.”^[3]

Though it is possible that smart contracts could one day reduce the costs associated with the contracted process by reducing human involvement, it is unlikely that they will ever be able to truly replace traditional contracts. Smart contracts cannot make subjective determination of legal issues or offer flexibility comparable to text based contracts which limit their application to simple residential transactions or collection of commercial rent at this time. For now, when it comes to crafting and drafting sophisticated real estate agreements, clients will still need to hire attorneys not robots.

[1] What are smart contracts on blockchain? | IBM

[2] An Introduction to Smart Contracts and Their Potential and Inherent Limitations (harvard.edu).

[3] Oracles | ethereum.org.