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Currently reading an article on smart contracts, I came across the following sentences. I cannot understand the bold part.

Smart contracts are agreements between parties that do not need an intermediary that checks that conditions are met. They facilitate the elimination of a third party and the urgency of trust and transparency when underwriting legally binds obligations.

I looked "underwrite" up in a dictionary, and was almost sure that it should mean to sign, because only by signing can a contract become legally binding. But that doesn't seem to make sense here. Does underwriting here mean signing?

Does the bold part mean:

smart contracts facilitate the elimination of the urgency of trust and transparency when ...

or does it mean:

the urgency.... legally binds obligations

?

Why are trust and transparency urgent when underwriting makes obligations legally binding?

  • Thank you. I had actually looked "underwrite" up in a dictionary, and was almost sure that it should mean to sign, because only by signing can a contract become legally binding. However, someone's explanation of the bold text made me suspicious that I may be wrong. – failbetter Oct 2 '17 at 11:26
  • On the other hand, you think the bold text means "They facilitate the urgency of ...". Actually, this same "someone" said he thinks the bold text is an independent sentence, and means "the urgency.... legally binds obligations" (i.e., in his opinion, "urgency" rather than "they" is the subject). Since he is a native English speaker and I am not, I have grown more doubtful of my initial understanding of the bold text, including the word "underwrite". – failbetter Oct 2 '17 at 11:26
  • whoops, yeah, the "someone" is correct about the separate clause. I didn't read far enough. I'm writing an answer to this question now. – AndyT Oct 2 '17 at 11:32
  • I've given up trying to write an answer. I think you're right about "underwriting" meaning "signing". So your bolded phrase means "when signing, the urgency of trust and transparency will legally bind obligations". Which makes no sense to me. Possibly someone with legal understanding can penetrate the jargon. – AndyT Oct 2 '17 at 11:49
  • Why do you think the "someone" must be correct? Can't the bold text mean "smart contracts facilitate the elimination of the urgency of trust and transparency when ... "? – failbetter Oct 2 '17 at 11:56
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According to the quoted text, a smart contract is one where there is no third party to underwrite the risk of one of the contracted parties not meeting their contractual obligations.

Underwriting of contract risk is a type of insurance where the underwriter guarantees to step in and meet any unfulfilled contractual obligations should one of the contracted parties fail to live up to their obligations.

In this sense, the underwriter is "legally binded" to the fulfil obligations.

Thus, with a smart contract there is no third party (the underwriter) so this eliminates "the urgency of trust and transparency when underwriting legally binds obligations".


TL/DR;

Regarding "trust and transparency", an underwriter will demand knowledge of all information relevant to the contract. In other words, it is "urgent" that the contracted parties fully disclose (transparently) all information that is considered relevant to the contract so that the underwriter may properly assess the risk.

If the contract goes wrong for reasons not disclosed to the underwriter as a potential risk, then the underwriter will not be required to pay out. For example, if one of the parties failed to disclose that they had a history of failing to meet their obligations.

  • That actually makes a lot of sense. It doesn't completely make sense (surely the elimination of insurance increases the "urgency" of trust as far as the remaining parties are concerned), but the article also says that bypassing security is a good thing, so... – Peter Taylor Oct 2 '17 at 21:53
  • In my experience, I have never heard that an underwriter is needed in entering into a traditional contract. A lawyer is needed, but the role she or he plays is not an underwriter who will assume obligations in case of breach by either of the contracted parties. The lawyer is just a middleman, I think. So, I tend to believe underwriting here means signing. – failbetter Oct 2 '17 at 22:43
  • Okay. Let's assume underwriting is what you think, i.e., a kind of insurance. Then "underwriting legally binds obligations" should mean: what the underwriter does makes obligations legally binding to both contracted parties, correct? Do you think that makes sense? Isn't signing that makes obligations legally binding? – failbetter Oct 2 '17 at 23:49
  • @failbetter It is the contract that makes obligations between parties legally binding. It is the underwriter that steps in if the contract fails to be honoured and it is their underwriting of the contract that obliges them to do so. Without an underwriter, the contracted parties would be left having to pursue matters in lengthy and costly legal action in the courts. The underwriter need not be an insurance company. For example, a parent may underwrite a child's mortgage obligations, making them liable to pay any arrears. – UserEpsilon Oct 3 '17 at 1:17
  • @PeterTaylor I don't think the text is suggesting that bypassing security checks is a good thing. It suggests that the smart contract is attractive if both parties are comfortable that they are in possession of all the relevant facts and therefore believe there is no need for a third party underwriting risk. The "urgency" present when involving and underwriter comes for the need to get all of the relevant disclosures ready before the underwriter agrees to underwrite the risk and the contract is able to be signed. – UserEpsilon Oct 3 '17 at 1:34
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I came to the conclusion that the article was written by a non-native speaker (there are various other things which don't look right), and then looked for the author's name and found that it's Italian. I then asked myself what word an Italian speaker might have calqued to underwrite. I'm not certain, but it seems like a reasonable educated guess that the article should say subscribing instead of underwriting.

That makes more sense that signing a piece of paper in the context of electronic services, but it still doesn't fully make sense of the sentence in question.

  • Yes, I agree the author may not be a non-native speaker. I just don't understand why the author doesn't simply say "signing" instead of underwriting if that's what he means. – failbetter Oct 2 '17 at 23:16
  • Smarts contracts eliminate the importance of trust and transparency in entering into a traditional contract for which obligations become legally binding by signing only - do you think this interpretation makes sense? – failbetter Oct 2 '17 at 23:18
  • I know what a smart contract is. A smart contract is "trustless", which means, entering into a smart contract doesn't need the kind of trust and transparency required for entering into a traditional contract, because the technique underlying a smart contract will ensure that everything goes well, without the contracted parties even knowing each other. I just don't understand what the author LITERALLY means by the bold text. – failbetter Oct 2 '17 at 23:30
  • No, I don't think signatures enter into it at all. Traditional contracts don't legally require paper, much less a signature. As to the author's actual intent, UserEpsilon's answer is quite convincing, and I was tempted to delete this one, but I thought I'd leave it up at least for a while in case someone else finds it useful and can build on it. – Peter Taylor Oct 3 '17 at 6:39
  • Please note that I just asked the author two questions: (1) does urgency mean importance and does underwriting simply mean signing? (2) smarts contracts eliminate the importance of trust and transparency in entering into a traditional contract for which obligations become legally binding by signing only – is this interpretation correct? The author said yes to both questions. – failbetter Oct 3 '17 at 7:47

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