Smart contracts are neither smart nor are they contracts
I am completing a part-time master’s in Blockchain and Digital Currencies, and one of the things I learned is that smart contracts, while revolutionary in automating the execution of agreements, are not truly ‘contracts’ in the traditional legal sense, nor are they ‘smart’ in the way that many assume. Coined by computer scientist Nick Szabo in 1996, the term ‘smart contract’ has led to misconceptions, including the belief that such contracts are powered by adaptive artificial intelligence. However, as Szabo clarified, these contracts are “smart” only in that they are more automated than their inanimate, paper-based ancestors, not because they involve AI.
A smart contract is, at its core, an automated script embedded within a blockchain, executing predefined conditions when certain criteria are met. This deterministic execution ensures adherence to the coded logic, but it also highlights a fundamental limitation: they cannot be understood as a “meeting of the minds” which is an essential part of any contract but rather should be seen as “implementations of contracts”. Unlike traditional contracts, smart contracts rigidly execute their programmed stipulations, making them akin to machines that do precisely what they are supposed to do AFTER some form of contract has been formed. A traditional contract implies a legally binding agreement between parties, recognized and enforceable by a court of law. Essential components such as mutual assent, consideration, capacity, and the ‘meeting of the minds’ are necessary to uphold a contract legally. While a smart contract can automate the execution of mutual assents, it falls short of embodying all elements of a conventional contract. Courts evaluating disputes may need to look beyond the code to surrounding communications and events to determine if a genuine agreement existed.
So how should samrt contracts be understood? Szabo identified four key properties of smart contracts: observability, verifiability, privity, and enforceability. Observability refers to the ability of parties to verify the performance of contractual obligations. Verifiability ensures that a contract’s execution or breach can be proven. Privity restricts the dissemination of contract information to the minimum necessary parties. Lastly, enforceability guarantees contract fulfilment Of these, enforceability is crucial, as it underscores the primary function of any contract: to ensure its terms are met. However, importantly contract enforcement is codified purely in the programme and does not necessitate the existence or lack of a genuine agreement.
In conclusion, while smart contracts revolutionise how agreements can are executed they themselves are not agreements. They are not ‘smart’ in terms of cognitive capability and are not ‘contracts’ in the legal sense. The role of smart contracts is best understood as a tool for enforcing digital agreements within the boundaries of their programming, necessitating broader legislative and interpretative frameworks to integrate them effectively into existing legal systems. While certain aspects of smart contracts can be achieved without blockchain, the full realisation of their properties — particularly enforceability — benefits from a decentralised ledger. Thus, while smart contracts offer a new approach to contractual enforcement, their limitations and need for supportive legal structures cannot be overlooked.
References:
• Shabo (1996) Smart Contracts: Building Blocks for Digital Markets. Source: https://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart_contracts_2.html
