Module 5

Smart Contracts and Artificial Intelligence


Module 5



1.0 INTRODUCTION
Business all over the world evolved with the concept of the Barter System. The barter system
made man realize the need for exchange for goods and services to enhance his/her standard of
living. Man realized that he could not meet all his necessities from the same piece of land and
thereby produced what best could be made from it. Production alone was not the ends of
meeting his necessity, finding someone who had the demand for the goods produced in
exchange for the desired commodity expected by the producer without the privileges of
effective communication, transportation and evolution of money made life difficult for people.
This system of exchange and the problems accompanied with it would have continued to exist
today if advancements in technology would not have prevailed.

In the modern world business is completely dependent on technology and to that extent that if
technology is removed from business all major industries would immediately collapse. Today
technology in business is a growing necessity and it has become almost impossible to separate
the two. Since business completely relies on innovation and because technology paves the way
for it, it can be observed that without technology business cannot sustain.

As far as the role of technology in business is concerned there is no doubt in saying that
technology in business has caused tremendous growth of trade and commerce. From complete
labor based industries to complete machine powered industries in less than five decades, the
manufacturing and marketing processes in industries have become more convenient, faster and
efficient than ever before. Technology has given business a new and better approach on how to
go about with business and with it the tools to achieve its goals. Among the many tools lies the
emergence of Smart Contracts and Artificial Intelligence in modern day business but really what
are they?

This chapter will help explain to you the concepts of smart contracts and artificial intelligence
and the relation between the two. But,before we begin understanding the two concepts let us
briefly understand the concept of blockchain and its importance in studding the two concepts.

2.0 BLOCKCHAIN TECHNOLOGY
At its most basic level Blockchain Technology can be defined as a set of boxes carrying digital
information where digital information in one box is continuous to the digital information in the
next block and so on, combined together by a chain representing one entire business

transaction. In context however the terms block and chain carry separate meanings. While
Block is a metaphor being used for digital information, chain is a metaphor being used for
public database. 1Perhaps in legal text the definition of blockchain could be referred as “storage

of digital information in public databases.” Each block in the blockchain is capable of holding
1MB worth of transactions and is allotted a different unique code called a “hash” which helps
distinguish one block from another. But how does it function?


2.1 HOW DOES A BLOCKCHAIN FUNCTION?
To determine how a blockchain functions four essentials must be fulfilled.



1. There must be a transaction




2. The transaction must be verified


3. The transaction must be stored in a block
4. The block must be given a Hash









Let us understand the functioning of the blockchain with the help of an example.

Let us assume that A, B and C went to a restaurant together for dinner. At the dinner A pays for
himself as well as for B and C. Both B and C promise to pay A later and all of them head home
different ways.

Next day both B and C transfer 2 Bitcoins each to A as their contribution to the previous night’s
dinner. Let us assume that all three of them held 3 Bitcoins each in their individual capacity
before making any transactions.

First B transfers his contribution (2 Bitcoins) to A. As soon as the transfer is made a record gets
created in the form of a block under the blockchain. This block stores the details of the entire
transaction between A and B. What the block also holds is the amount of Bitcoins already held
by A and B before the transaction is made. After the transaction the block might look
something as illustrated in Fig2.1.1.





B 2 Bitcoins to A

B: 1 A: 5



XY123 (UIC)





Fig.2.1.1



As soon as B’s transfer is complete C sends his share of contribution to A also using Bitcoin as a
preferred mode of payment. His transaction gets recorded in a new block under the blockchain.
Similar to the previous block (as mentioned in Fig.2.1.1) this newly formed block stores the
entire transaction details, but this time between A and C. What this new block will also contain
is the transaction details of the previous block so as to show continuity in the transaction as
each block takes reference from the previous block on the amount of Bitcoins owned by each
person. The entire transaction might look like:





B 2 Bitcoins to A C 2 Bitcoins to A

A: 5 B: 1 C: 3 A: 7 B: 1 C: 1
XYZ123 (UIC)
DFG645 (UIC)






HASH: XYZ123 HASH: DFG645

PREVIOUS HASH: 0000 PREVIOUS HASH: XYZ123



Fig. 2.1.2



The second block in Fig2.1.2 is linked with first block and it shows the continuity in the
transaction. But what happens to the first block? Well the first block, also known as the Genesis
block is not linked with any blocks well because it is the first one. The first block records the
first transaction and cannot be linked with any previous blocks. The other blocks in the chain
are linked to their previous blocks to prove continuity in the transaction. This entire chain of
blocks is known as a ledger. This ledger is then distributed to all the parties involved in the
transaction to form a “public distributed ledger”. This method of distribution is also known as
the Peer-to-Peer or P2P network. Where a new block is added to the chain every member of
the transaction will be alerted of this new addition. Each member will then effectively
communicate with other members of the chain on the blockchain enabled “Consensus” where
they will together discuss the authenticity of the added block and its status, whether or not it is
valid or not. Once the members feel that the addition is clear and is not interfering the contents
of the chain the members will add the new block to their ledger. This form of distribution
prevents the blockchain from being tampered by any hacker.

Coming to the example, what will happen if someone tries to hamper with the second block? As
soon as somebody tries to hampers with the second block the hash in the second block will
automatically change. Once changed, the blockchain system will make all blocks following block
2 invalid as they will no longer store the new hash of the second block. So hampering with a
single block will make all following blocks invalid.

Another question that raises questions in mind is what happens to the transaction if let’s say C
transfers 2 more Bitcoins to A when he only has 1 Bitcoin in his reserve? The answer is simple.
The blockchain will consider the transaction as invalid and will not make any transfer given that
C is transferring more Bitcoins than he actually owns. Furthermore B can also point out C’s
transaction as invalid since every member in the blockchain has been distributed a copy of the
ledger and by looking at it, it will become clear whether C is transferring more Bitcoins to A
than what he possesses in his reserve.

Thus if a hacker tries to make any changes in any block transaction,

1. The hash in the block will automatically change, and

2. Every person in the transaction will be able to find out the change given that each
member in the transaction has a personally distributed copy of the ledger.

Apart from the hash algorithm and distribution of copies of ledger the blockchain also provides
security by a mechanism know as “Proof of Work”. This mechanism slows down the creation of
new blocks. In case of Bitcoins solving the proof of work for one block can take up to 10
minutes before adding an additional block. This mechanism is performed by people known as
“miners”. Miners basically prove the validity of the blocks added in the blockchain by solving
complex mathematical problems. Whichever miner solves the problem first and adds the block
to the blockchain is rewarded with 12.5 Bitcoins. This process of solving the complex
mathematical problems is known as “Proof of Work” and the process of adding the additional
block to the blockchain is known as “Mining”. Once the miners add the additional block to the
blockchain the transfer is complete.

Walmart is the biggest example that uses the blockchain technology. Walmart uses the
technology in determining where in its supply chain the product gets damaged before it is
supplied to the customer. Every stage in Walmarts supply chain has been recognized with a
block. Thus every time a product passes a stage (in good condition) the condition of the product
is identified and stored in the block that represents that specific stage. Once the condition of
the product is identified and stored under all the blocks in the blockchain Walmart can view the
chain and recognize the stage at which the product suffered damage.

Now that we have understood what a blockchain is and how it functions let us move on to
understand the concept of smart contracts. Blockchain and Smart Contracts are very closely
related. One must learn that smart contracts are completely depend on blockchain for security
and cannot sustain without it. Therefore to study Smart Contracts, it is necessary to first
understand the concept of blockchain.


3.0 SMART CONTRACTS
2“Smart contracts are lines of code that are stored on a blockchain and automatically execute
when predetermined terms and conditions are met. At the most basic level, they are programs
that run as they’ve been set up to run by the people who developed them. The benefits of smart
contracts are most apparent in business collaborations, in which they are typically used to
enforce some type of agreement so that all participants can be certain of the outcome without
an intermediary’s involvement.”


2 https://www.ibm.com/blogs/blockchain/2018/07/what-are-smart-contracts-on-blockchain/

In other words a smart contract is an automated contract formed over the internet between
two or more persons facilitating sale and purchase of goods and services. To secure the
contract thoroughly, the contract is protected under the blockchain technology. Since the
contract is formed over the internet and is protected under the blockchain technology it is
stored in form of codes which can be understood only by the computer. Being automatic in
nature it becomes binding on the parties only when the conditions mentioned in the agreement
are met. Smart contracts are more transparent, simple and efficient to every financial
transaction and avail maximum security promised under the blockchain technology.



3.1 WHAT DO SMART CONTRACTS DO?
The easiest way to understand what a smart contract does is with the help of an example.

3Imagine you are purchasing a car from a dealership. At the time of making the purchase the
salesman makes you fill loads of paperwork before actually handing you the keys to your new
car. Most of this paperwork requires you to fill your personal information and identity proofs
multiple times. Sometimes you might even have to meet several people such as the finance
broker, salesperson and make various visits to the bank before getting the ownership of your
new car. Filling up those piles of paper work and meeting new people can be very time-
consuming, tedious and frustrating. While they may be troublesome for you they are indeed
very important for the dealership in case of any breach, uncertainty and mistrust.

So basically what Smart Contracts do is that they streamline these loads of paperwork and
unwanted visits to the banks between the parties into a computer based automatic contract.
This contract becomes binding on the parties only when the conditions mentioned in the
contract are met. The conditions of the contract are completely configured by the parties in
reference with the developers of the artificial intelligence system that helps in strengthening
the terms of the contract and prevent any gaps during the course of the agreement.

Smart contracts are also secured by blockchain technology which helps in preventing any forms
of data breach. The blockchain technology already stores the personal information of the
parties (in our case the bank, the dealer and the purchaser) such as the credit standing of the
purchaser, enabling the parties to make speedy decisions. Once the money is released to the
dealer he hands over the title of the car to the bank and repayment is initiated as per the
conditions of the contract. The transfer of ownership is automatically stored as the entire
transaction is recorded in the blockchain. Since smart contracts are secured by blockchain a
copy of the entire transaction which is recorded as a ledger is sent to each party individually.


3 https://www.ibm.com/blogs/blockchain/2018/07/what-are-smart-contracts-on-blockchain/

The transaction is also stored in the public distributed ledger and can be viewed by any party at
any given time.



3.2 HOW DO SMART CONTRACTS FUNCTION?
Smart contracts only become liable on the parties when the terms and conditions specified in
the contract are met by them. To ensure no possibility of breach, uncertainty or mistrust
between the parties as soon as the conditions or the terms of the contract are met a network of
computers (or an artificial intelligence system) executes the contract without any involvement
from any of the parties. Thus as soon as the contract is executed the transaction gets recorded
in the blockchain and is uploaded on the public distributed ledger for the parties to view it.

To understand the concept better let us take the help of an example.

Buyer A places an order with seller B for purchase of 10 motorcycles to be delivered to him in 1
week. Seller B accepts the proposal and promises to deliver the motorcycles within the
stipulated time. Instead of directly paying Seller B the amount of the purchase buyer A places
the money in an escrow account. The terms and conditions of the entire contract are recorded
in the computer system with clear instructions that money will only be transferred to seller B’s
account only if he delivers the motorcycles to Buyer A within the stipulated time. the following
contract may have 2 conclusions

1. Where the motorcycles are unable to get delivered by seller B to buyer A within the
stipulated time, the network of computers will automatically return Buyer A his money
from the escrow account and terminate the contract, or

2. Where the motorcycles are delivered to buyer A within the stipulated time by seller B
the computer network will automatically transfer the amount of money from the
escrow account to the account of seller B and will record the transaction in the
blockchain. Both parties will be able to view the transaction at any time from the public
distributed ledger.

In both the cases however the manufacturer of the motorcycles will be notified about the sale
or return of the goods manufactured.

The entire transaction will electronic and automatic in nature. There will be no interference of
any parties as the entire contract will be codified into lines which only the computer can
understand. Once the terms and conditions are decided by both the parties in an interactive
session with the developers of the contract, the terms of the contract cannot be changed by
either of the parties involved in the contract.

As already discussed the terms of the contract are determined by both the developers and
involved parties together in an interactive procedure. While developing the terms both parties
determine how the transaction and the data will be represented in the blockchain, the rules
that will govern the transaction, all possible loopholes in the agreement and identify a dispute
resolution body in case of a disagreement between the parties.

Let us now understand the relation between Smart Contracts and blockchain in detail.

3.3 BENEFITS OF SMART CONTRACTS
With the security of blockchain technology and expert computer systems to govern a contract,
smart contracts are becoming the most credible alternative against traditional paper based
contracts and are completely changing the way of doing business.

Here are a few advantages of Smart Contracts over traditional paper based contracts. They are:

1. Direct dealing with customers: Smart Contracts encourage transparency and direct
relations with customers. They completely remove the need of any intermediaries such
as lawyers or any other beings in the smooth functioning on the contract.

2. Resistance to Failure: In a Smart Contract there is no involvement of any third party.
Smart Contracts are completely decentralized. If any person leaves the blockchain, the
transaction shall continue to function without any loss to data.

3. Trust: since smart contacts are secured by blockchain they can be trusted with data and
transactions more in comparison to a traditional paper based contract. Being secured by
blockchain, these contracts are less likely to be altered by any third party.

4. Fraud reduction: as mentioned before smart contracts are completely secured by
blockchain. These contracts cannot be hacked easily. They are also transparent in nature
given that each member involved in the blockchain is given a copy of the ledger making
it impossible for any person to make any alterations in the entire chain.

5. Cost-efficient: smart contracts are cost efficient in the manner that they completely
eliminate the interference of any intermediaries and with them their heavy
commissions.

6. Record Keeping: Being secured by blockchain all the transactions in a smart contract are
stored in blocks and can be viewed at any time by the given parties with the use of the
public distributed ledger. Thus any party can view the entire chain of transactions in a
blockchain.

3.5 BENEFITS OF BLOCKCHAIN IN SMART CONTRACTS
After learning about Blockchain and Smart Contracts individually let us now discuss the benefits
of blockchain technology in Smart Contracts. Therefore they are:

Enables Speed and Accuracy: Smart Contracts are digital and automated in nature. This
makes them less prone to tedious and time consuming processes, such as processing
paperwork, reconciling and corrections of errors which are time consuming and
necessarily required to prevent loopholes in paper contracts. Thus Smart Contracts are
clearer in legal language as they are encrypted in computer codes, better than written
paper contracts.
Creates Trust: Since Smart Contracts are automated in nature, they only become liable
on the parties when the conditions mentioned in the contracts have been fulfilled. Such
conditions are already well distributed between the parties individually by virtue of the
blockchain so no person can raise questions on whether the conditions to the contract
have been altered.
Provides High Security: Smart Contract records are blockchain encrypted making them
almost impossible to hack. Since each transaction is related to the previous transaction
and are recorded in distributed ledgers, hackers will have to hack the entire chain of
transaction to make a simple change.
Enables Savings: since a person’s entire personal record is stored in blockchain,
companies and banks are saved the expense of making a thorough search on the person
with the help of employing various third men. Thus no person is also required to verify
over the terms of the contract since the entire contract is in the form of computer
codes.

4.0 ARTIFICIAL INTELLIGENCE
4Artificial Intelligence shall be referred as “the simulation of human intelligence in machines
that are programmed to think like humans and mimic their actions.” The term Artificial
Intelligence can be given to any machine that expresses human traits such as learning and
problem solving.

The basic purpose behind Artificial intelligence is to make human intelligence easily mimicked
by machines so as to execute the simplest and the most complex of human tasks stimulating
human like capacities of learning, reasoning and perception into machines.

Artificial Intelligence is basically a part of computer science that aims to create intelligent
machines. These computer based systems are programmed to mimic human traits and learn
and observe human behavior. These programmes are usually created to mimic human abilities
of

acquiring knowledge
giving reasons


4 https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp

1. RELATIVE MACHINES

solving problems

observing and interpreting current surroundings

learning

planning, and

manipulating and moving objects

An Artificial Intelligence system can only act and react like humans on the basis of the capacity
of data stored in its computer programs. Not all artificial intelligence systems can mimic all
human capabilities. In fact the closest that man has ever been in creating an artificial
intelligence system that can learn and respond to human behavior is the Sophia Robot which
was established in Singapore in 2016. It is the only robot in the world to hold citizen of any
country. The country of Saudi Arabia awarded Sophia permanent citizenship in the year 2017.

In order to learn and mimic human cabalities artificial intelligence computer programs must
have access to abundant information relating to the world. They must have access to objects,
categories, properties and relationships between humans, along with the latest research in
engineering to mimic human activities such as using common sense and solving problems to
accomplish the most complex of tasks.

An Artificial intelligence program observes its current surrounding by using the various cameras
and sensors installed in it. It then analyzes these visual inputs with the help of various computer
systems, face recognition, object recognition and gesture recognition systems and performs
actions favorable for the human it is inter-acting with. While most artificial intelligence systems
cannot study the behavior of a human being they simply accomplish the task they are
programmed or designed to do when asked.

Robotics is the most important field of artificial intelligence. Researchers involved in the study
of artificial intelligence are determined in creating human-like robots which can perform almost
all human capabilities including the ability to self consciousness and the ability to take rational
decisions for it and other fellow robots.

The public reaction on artificial intelligence is however mixed. While some people encourage
further advancements in the subject, many believe that is threat to the future.



4.1 TYPES OF ARTIFICIAL INTELLIGENCE
There are 4 types of Artificial Intelligence:

2. LIMITED MEMORY
43. . STEHLFE OARWYA ORFE NMNINESDS


















Reactive Machines: the Term Reactive in Reactive Machines indicate that these artificial
intelligence machines only act in the current situations or present day situations as they have
no memory or past experiences to react in present day problems. These machines only perform
simple tasks and are limited to only what they are programmed to perform. These Artificial
Intelligence machines do not recognize the concept of world, place or time and perform the
same task for which they are programmed forever unless reprogrammed. Such Artificial
Intelligence machines are characterized with stagnation in behavior. A very good example of
this form of Artificial Intelligence is the Deep Blue software which was introduced in 1980 by
IBM for the purpose of defeating human competitors in the game of chess. Deep Blue software
has been programmed to predict the moves the opponent might take and win. It was the first
artificial intelligence software to defeat a human when it defeated the Russian chess
grandmaster Garry Kasparov in 1997.

Limited Memory Machines: As the name suggests, limited memory Artificial Intelligence is a
machine that has the ability to store previously installed knowledge, data and events. Unlike
Reactive Machines, Limited Memory Artificial intelligence machines have the ability to learn
from the past data programmed in them and also by making observations in the external
environment. The best form of example of Limited Memory Artificial Intelligence machines is
autonomous cars which use their limited memory and past knowledge along with real time
observation skills to drive amongst human controlled cars. These autonomous cars observe the
pattern of the road and detect even the smallest of changes in the external environment
thereby either causing the car to slow down or even come at complete stops. They are also
always observing the distance of the car in front of them and also on the sides in case of lane-
changing.

Theory of mind machines: the concept of Theory of Mind is based on the principle of enhancing
decision making ability equal in capacity of that of a machine with that of a human mind. This
concept of Artificial intelligence recognizes the need of understanding peoples behaviors and
emotions and on recognizing, enabling the machine to react in a persistent manner. This type of
Artificial Intelligence stresses on establishing effective interactions or conversations between
humans and machine with the objective of requiring the machine to identify, understand,
retain and remember emotional output and behaviours while knowing how to respond. This
would mean that the machine will have to adapt into its learning centre on how to
communicate with different people at different situations. This type of Artificial Intelligence is a
little hard to achieve given that it requires the machine to adjust to different human behaviors
in a moment’s time. Two examples to this form of Artificial Intelligence are the Kismet and
Sophia robot. While Kismet is able to recognize facial expressions and retaliate back by making
facial gestures, Sophia Robot goes one step further with her ability to see and have human- like
physical likeness.

Self awareness machines: This type of Artificial Intelligence expects machines to have human-
like consciousness. Replicating and recognizing humanlike actions alone doesn’t satisfy the
concept of human-like consciousness in a robot, but the ability of making decisions for itself,
having desires and understand feelings is what is being expected from Artificial Intelligence to
perform. Currently there are no examples of such form of Artificial Intelligence, however in the
later years if one example is created it will be considered to be the most advanced form of
Artificial Intelligence.


4.2 RELATIONSHIP BETWEEN ARTIFICIAL INTELLIGENCE AND SMART CONTRACTS
The relationship between Artificial Intelligence and Smart contracts is one that goes hand in
hand. In brief their relationship states that where Artificial Intelligence enters Smart Contracts,
Smart Contracts become more effective in executing complex contracts. This is based on the
concept that the more the data Artificial Intelligence have to offer the better become the
outcomes of Smart Contracts.

When parties in a smart contract negotiate it is basically the artificial intelligence that dictates
the terms and conditions of a contract. With the introduction of stronger artificial intelligence
software’s the functions of artificial intelligence in smart contracts have broadened. Now-a-
days artificial intelligence is vested with the responsibility to analyze past negotiations to see
how parties negotiated in the past and suggest to the parties the preferred language of the
contract and important clauses likely to secure the agreement. Moreover artificial intelligence

is also vested with the responsibility to identify terms not previously considered which earlier

caused havoc and incorporate them into future contracts.

With time even the ability of artificial intelligence to track important aspects of a contract have

also enhanced saving large amounts of time. In short the point being that stronger the Artificial

Intelligence in a smart contract, the smarter becomes the smart contract.



While the aforesaid contention just explains the relationship between smart contracts and

artificial intelligence. What happens when blockchain is combined with artificial intelligence?

Does it make smart contracts stronger?





4.3 RELATIONSHIP BETWEEN ARTIFICIAL INTELLIGENCE AND BLOCKCHAIN. CAN THEIR

COMBINATION MAKE SMART CONTRACTS SMARTER?

Blockchain and Artificial Intelligence are the biggest giants in the technological industry and at

present the hottest topics of discussion. Even though both these topics are relevant in different

fields they are united at two levels:



DATA



SMART CONTRACTS


While we all are familiar with the relationship of smart contracts with both artificial intelligence
and blockchain, what we are not familiar with is their similarity with data. The answer is very
simple. While Artificial Intelligence deals with processing huge amounts of data, blockchain
offers security, immutability and decentralized data storage. Both these mediums have a
common field with data and smart contracts; now let’s see if their combination together
enhances the quality of smart contracts?


1. Artificial intelligence and encryption work very well together: Smart Contracts are
highly dependent on blockchain for security and artificial intelligence for data. With the
combination of both, the data which artificial intelligence systems have to offer and are
highly personal could be stored into blockchain databases which shall hold this
information in an encrypted state. This would prevent large scale data breaches leading
to loss of highly sensitive personal data and save lots of money to big businesses that
deal with protecting such data. When artificial intelligence data will be protected by
blockchain, there will be no loss of important data and artificial intelligences will have

more to offer since they will have better memory and past experience of contracts to
rely and make terms and conditions on. Their combination together will make smart
contracts smarter.

2. Blockchain can help us track, understand and explain decisions made by artificial
intelligence: Combining blockchain and artificial intelligence can solve one of the biggest
hindrances with artificial intelligence. Trust! Sometimes decisions made by artificial
intelligence systems can be hard for humans to understand. This is because artificial
Intelligence is capable of assessing large number of variables independent of each other
and “learning” which is important to the overall task it is trying to achieve. In other
words Artificial Intelligence systems are expected to increasingly be used in making
decisions whether or not a financial transaction is fraudulent and should be blocked. For
some time though, since artificial intelligence data is open to breach because of weak
data protection reliance is still being given to human workers to audit with accuracy.
However the day artificial intelligence and blockchain combine, artificial intelligence will
be stronger to deal as its data will be protected and will result in making smart contracts
more reliable for people.


3. Artificial intelligence can manage blockchains more efficiently than humans: just like a
human expert becomes better and more efficient at cracking codes with every passing
day, similarly an artificial intelligence system also becomes more efficient with cracking
more and more codes. However there is a huge difference. A human expert gains
experience after practicing for a long time; however this is not the case with an artificial
intelligence system. An artificial intelligence system would immediately sharpen its skills
if it is fed properly in its training data. The introduction of artificial intelligence in
blockchain will also help eradicate the hashing algorithm used to distinguish between
blocks using the brute force approach and in turn reciprocate blockchain with
something latest and far more efficient. This in turn will also make smart contracts much
stronger than before encouraging more people to rely on them by virtue of having a
much stronger blockchain.


Adding artificial intelligence and blockchain together to the already blockchain enabled smart
contracts will increase the efficiency of smart contracts as a whole. Where artificial intelligence
and blockchain will work together smart contracts will become effective at both, dictating
contract terms and ensuring security thereby reducing the need for human verification,
intervention and analysis. Together artificial intelligence and blockchain will simplify the

negotiations and execution processes, with the ability to facilitate complex agreements and
lead to greater efficiencies.

The day artificial intelligence and blockchain come together; smart contracts will become
programmes which will interpret human language into a structured intent enabling seamless
communication of commercial interests between robots and human giving robots the right to
form contracts. The question will then be how will robots conclude contracts?

5.0 CAN A ROBOT CONCLUDE A CONTRACT?

The answer to the question “Can a Robot conclude a contract” may not seem to be of any
importance right now but then it isn’t even as far-fetched as it may seems. With the creation of
the Sophia robot back in 2016 researchers in artificial intelligence have proved that the day is
not far when we humans will share this earth with Robots. In a world where robots and humans
will co-exist everything will be governed by smart contracts and artificial intelligence systems
and all our commercial transactions with robots will be termed as contracts. So basically how
will robots conclude contracts?

In a world where robots and humans will co-exist robots will conclude smart contracts with
humans on all commercial transactions. Since majority of the working staff will be present in
the form of robots, the purchase of any good or service from a robot will result in an automated
contract between the robot and the human. Being an artificial intelligence system, the robot
will configure a smart contract on the basis of a formed transaction between you and the robot.
The contract will be completely automatic in nature and be based solely on the transaction
between you and the robot. Before binding itself to the contract the robot will once verify the
transaction with the human in case any error or change is made. Once the green light is given
the transaction will automatically get stored in a block under the blockchain and be given a
hash to completely differentiate the block from others in the blockchain containing similar
transactions. Once the hash is given and the transaction is completed a copy of the entire
transaction will get distributed to both the system as well as to the human involved in the
contract. Every transaction will be able to be viewed at anytime with the help of the public
distributed ledgers where the blockchain will automatically update the transaction.

The contract will be completely automated and will be governed by various terms and
conditions. The terms and conditions will be generated by the developers of the artificial
intelligence system and the robots. They will be pre-determined. The contract will only
conclude once the terms and conditions in the agreement are met by the human as well as by
the robot. There will be no need to share any personal information since all your personal

DRINK REGULAR LARGE

VANILLA CAPPUCCINO RS. 200 RS. 300

CHOCinOfLoArTmE aCtAioPnP UwCiCllI NalOre a d y b e s t o r e d o n t h e b l o RcSk. c2h0a0i n a l o n g RwS.i t3h0 a0l l o t h e r i m p o r t a n t i n f o r m a t i o n
such as your credit holdings, financial position etc. The entire transaction will be paperless, less
time consuming, secure and will not require the involvement of any third party. As mentioned
earlier the terms of the contract will be fixed and free from all types of alterations. The entire
contract will be secured by blockchain making it impossible for any hacker to make amends.

Let us now understand the entire procedure with the help of an example.

STEP 1 – Formation of a transaction

Imagine a world where humans and robots co-exist. This world is completely governed by smart
contracts. Technologies like artificial intelligence and blockchain function together. In such a
world all robot and man-made contracts are smart contracts and are secured by blockchain.

Let us imagine that Ashley is standing at the counter of a coffee shop wanting to order a cup of
coffee. Behind the counter on the opposite wall, the entire menu of the coffee house is
displayed. After reading the entire menu Ashley decides to go ahead and order a cappuccino.
The salesman standing in front of Ashley is a robot. He has been programmed with the entire
menu stored in his system. This is how the robot will make a contract of the entire transaction.
As soon as Ashley reaches the counter to order his drink the robot will greet him and ask him
his desired choice of beverage. Once Ashley tells him that he would like to order a cup of
cappuccino. The robot will make the following choices available to Ashley







Once Ashley selects his preferred choice of cappuccino, the robot will ask whether he desires a
different commodity with his selected drink. In this example let us consider that Ashley only
ordered a regular sized vanilla cappuccino.

STEP 2- Verification of the transaction

SMART CONTRACT LOCATION-New Delhi, India DATE: 24/7/2019

AGRRUEELEMSE NT: Ashley agrees to purcMhaEsNe Ua regular sized vanilla cappucOciPnToI OfrNomS XYZ coffee house

for RS. PD2AE0YL0IMV IENEORNRnYT c AIeNF T AREUsRhP lEeEyS haAs RfinTaIlFizIeCdCLI AAAhTPiLsTP E UoI CNrdINTeO rE tLhLeI GroEboNt CwEil l ask AsCVhHAleNOyICL OtLoALA vTeEr ify his order before entering

PAYMEinNtTo a contract with himE. SOPRnElySS wO hen Ashley will accept this verification will the robot form a

contract.



STEP 3- Formation of the contract: Once Ashley has verified and agreed to his order, the
artificial intelligence system in the robot will form a smart contract out of the entire
transaction. In the system the contract may look something like this:

The above showed contract will be completely automated and will be governed by
aforementioned rules. These rules or terms and conditions will be generated by the developers
of the artificial intelligence system and the robots. They will be pre-determined and fixed. The
contract will only commence when terms and conditions in the agreement are met by the
person making the order. There will be no need to share any personal information since all the
personal information will already be stored on the blockchain along with all other important
information such as credit holdings, financial position etc. The entire transaction will be
paperless, fast, and secure and will not require the involvement of any third party. The entire
contract will be secured by blockchain making it impossible for any hacker to make amends.

STEP 4 storing the transaction in the blockchain and assigning the hash

Once the contract is formed the entire transaction will get stored in a block under the
blockchain. The block will be assigned a hash or a unique identity code that will separate the
block from other blocks under the blockchain carrying similar transactions. Once the hash is
assigned the entire transaction in the form of a ledger will be distributed between the parties
and the parties will be able to access the transaction at any given time.


6.0 LEGAL STATUS OF ARTIFICIAL INTELLIGENCE PROGRAMS AND SMART CONTRACTS
UNDER INDIAN LAW


As far as the laws in India are concerned the contract Law is completely silent in determining
the power of a robot to conclude a contract. It is a fact that the Indian Contract Act is unable to
cope up with the advancements in technology. There was however an explanatory note by the
UNCITRAL Secretariat with respect to the matter. Thus it stated that “messages from such
automated systems should be regarded as ‘originating’ from the legal entity on behalf of which
the message system or computer is operated.” This note questioned the status of the legal
personality of artificial intelligence in India, and on checking the status I was in despair. “No
Indian law currently in force recognizes artificial intelligence systems as legal persons”, which
prompted the question if not now then when will the legislation take steps for their
recognition?

Bibliography



Introduction

Article “The role of technology in business”, America’s SBDC Oklahoma,

https://www.oksbdc.org/the-role-of-technology-in-business/

Blockchain Technology

Fortney, Luke “What is Blockchain”, Blockchain Explained, Investopdeia.com, 25th June 2019,
https://www.investopedia.com/terms/b/blockchain.asp

Simplilearn, “blockchain in 7 minutes/what is blockchain/blockchain explained
simply/blockchain/ Simplilearn”, youtube.com, 27th February 2019,
https://www.youtube.com/watch?v=yubzJw0uiE4
Simply Explained- Sanjee, “How does a blockchain work-simply explained” , youtube.com, 13th

November 2017, https://www.youtube.com/watch?v=SSo_EIwHSd4

Smart Contract

Simply Explain- Sanjee, “Smart Contracts- Simply Explained”, Youtube.com, 20th November 2017,

https://www.youtube.com/watch?v=ZE2HxTmxfrI

Gophie. Nigel “ What are smart contracts”, What are Smart Contracts on Blockchain, IBM.com,
2nd July 2018, https://www.ibm.com/blogs/blockchain/2018/07/what-are-smart-contracts-on-
blockchain/

H, Tania. “Benefits of Smart Contracts”, A Guide to Smart Contracts and their Implementation,
RubyGarage.com, 16th January 2018, https://rubygarage.org/blog/guide-to-smart-contracts

Gophie. Nigel, “What are the benefits of Smart Contracts”, What are Smart Contracts on
Blockchain, IBM.com, 2nd July 2018. , https://www.ibm.com/blogs/blockchain/2018/07/what-

are-smart-contracts-on-blockchain/

Artificial Intelligence

“Artificial Intelligence (AI)”, Technopedia.com

https://www.techopedia.com/definition/190/artificial-intelligence-ai

Frankelfield, Jake. “What is an Artificial intelligence”, Artificial Intelligence (AI),

Investopedia.com, 13th June 2019. https://www.investopedia.com/terms/a/artificial-

intelligence-ai.asp

Reynoso. Rebecca, “Types of artificial Intelligence” Four main Types of artificial Intelligence,

learn.g2.com, 27th March 2019, https://learn.g2.com/types-of-artificial-intelligence



Relationship between artificial intelligence and smart contracts

Legal Blockchain, “ The value of AI in smart Contracts for law”, Combining Blockchain and AI to
make smart contracts smarter, Medium.com, 2nd February 2018

https://medium.com/blockchain-for-law/combining-blockchain-and-ai-to-make-smart-

contracts-smarter-88081712b192

Relationship between Artificial Intelligence and Blockchain, can their combination make smart
contracts stronger?

Mar. Bernard, “Artificial Intelligence and Blockchain” , 3 major benefits of combining these two
mega –trends, Forbes.com, 2nd March 2018.
https://www.forbes.com/sites/bernardmarr/2018/03/02/artificial-intelligence-and-blockchain-

3-major-benefits-of-combining-these-two-mega-trends/#2c9e49774b44

Can Robots conclude contracts?

Alasaarela. Mikko, “ How Smart Contracts will enable us to busimess with Ai and robots”,
GoodAudience.com, 7th October 2018. https://blog.goodaudience.com/how-smart-contracts-

will-enable-us-to-do-business-with-ai-and-robots-48e99ed844d5

Legal status of artificial intelligence and smart contracts under Indian law

Nishith Desai Associates, “AI and the law-legal and tax issues”, The Future is here: Artificial
Intelligence and Robotics, may 2018, Nishith Desai.com.
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Artificial_Intelligen
ce_and_Robotics.pdf