Smart Contracts: Neither Smart nor Contracts ;-)

The quote “Smart contracts are neither smart nor contracts” comes from a legal perspective and is thought-provoking, especially for the blockchain developer community. This statement opens the door to a deeper investigation into what smart contracts are and are not, far beyond the code that forms their foundation. To give blockchain developers a clearer idea, we analyze this quote and discuss the legal nature of smart contracts.

Smart contracts are a fundamental building block in the world of blockchain technology, which is often associated with business transaction transformation. By automating transactions based on predefined conditions, they seem to offer an efficient and transparent way to settle contracts. But how “smart” and “contractual” are they really?

A look at Vitalik Buterin’s perspective

Vitalik Buterin, one of the co-founders of Ethereum, expressed his thoughts on naming smart contracts in a conversation that garnered some attention. In an interview, he said: “I regret calling [smart contracts] that. It should be something more technical and less misleading.” (Source: bitcoinist.com). Buterin’s concerns reflect the often misunderstood nature of smart contracts. He further stated that a term such as “persistent scripts” or “durable scripts” would be more appropriate to represent the technical functionality of these contracts, without the legal implications that the word “contract” entails¹.

Buterin’s statement emphasizes that smart contracts, despite their name, do not fulfill traditional contract structure or obligations, but instead are snippets of code that respond to specific triggers and perform actions on a blockchain. His comment highlights the importance of clearly understanding and correctly using terminology in this rapidly evolving area of technology.

In another interview, Buterin spoke about blockchain as a whole, smart contracts, gatekeeping participants and the use of blockchain outside of financial incentives, showing that the discussion around smart contracts and what they are called is part of a larger discussion about the role and functioning of blockchain technology².

These insights from one of the leading minds behind Ethereum and smart contracts offer a valuable perspective on the challenges and opportunities that smart contracts present in the legal and technological landscape.

Legal framework

Despite their name, smart contracts are never actually contracts in the legal sense, since they consist of computer software and computers cannot make legally binding declarations of intent. In the legal world, contracts are characterized by the existence of offer and acceptance between the parties who intend to be legally bound. Smart contracts are more like self-executing codes that automatically trigger actions when certain conditions are met. Their “smartness” here refers to their ability to perform actions without human intervention.

However, smart contracts can serve as contract scripts that help fulfill the terms of a traditional contract. In this role, they can form an integral part of contract management by helping to automate and increase efficiency.

Here we dive deep into legal theory, which makes the discussion around smart contracts particularly fascinating, but also complex. The distinction between the technical function of a smart contract and its position in the legal context is essential to understand the full scope and potential applications of this technology.

Legal binding: a gray area

The legal binding of smart contracts is a complex matter that is influenced by numerous factors, including the understanding and agreement of the parties involved to the underlying code. A key point here is that all parties must understand and accept how the smart contract works and its terms. However, the technical complexity of the code on which the smart contract is based can be challenging, requiring specialized knowledge beyond the usual level.

In terms of legal classification, smart contracts vary by jurisdiction and in some cases can be considered electronic contracts that are formed through offer and acceptance. According to the German Civil Code (BGB), electronic contracts are generally permissible as long as they comply with the general terms and conditions of the contract. But depending on the legal system and the type of contract, the written form may be required. In German law, for example, the written form is mandatory for certain contracts, such as real estate purchase agreements. The question of whether a smart contract can meet the written form requirements is controversial and depends on the formulation of the respective contract.

Another legal aspect concerns the contracting parties in a smart contract. In the case of natural persons or legal entities, this is usually unproblematic. It becomes more difficult when one of the parties to the contract is an autonomous agent or a blockchain platform. In such cases, it is critical to clearly define the responsibilities and liabilities of the parties involved.

Smart contracts can serve as complementary tools to traditional contracts written in natural language. You can automatically execute specific contract terms, contributing to efficiency and transparency. However, their legal binding is often tied to the overarching contract, written in natural language, that sets the terms and framework for the execution of the smart contract.

Because even executory contracts are stored and executed on a decentralized blockchain platform, determining the applicable law and jurisdiction can be challenging. It is therefore advisable for contracting parties to include a choice of law clause in the contract to avoid legal uncertainties.

Integrating smart contracts into traditional contract structures can create legal certainty by establishing clearly defined conditions and rules for the automatic execution of certain contract elements. But even in this scenario, challenges remain, such as how to deal with unforeseen circumstances not foreseen in the smart contract code, or how to resolve disputes resulting from the execution of the smart contract.

The legal recognition and binding of smart contracts is a dynamic and evolving field that explores the intersection of law and technology. Both technological development and legal clarification are essential to enable a solid understanding and effective use of smart contracts in practice.

Conclusion

The analysis of the quote on smart contracts is thought-provoking and highlights the importance of thinking beyond the technical level and understanding the legal aspects involved in implementing smart contracts. While they have the potential to transform business transactions, their legal nature is complex and requires careful consideration.

The inspiration for this blogpost did not come by chance, but was triggered by an exciting encounter. I was recently contacted by a prospective PhD student at the University of Hannover who would like to write her PhD on this very topic. She was looking for the advice of an expert for an exchange of ideas and therefore approached me. This exchange not only prompted me to take a closer look at the legal facets of smart contracts, but also demonstrates the increasing importance and interest in the intersection of law and technology in academia.

Through such interdisciplinary conversations and research, we can gain a deeper understanding of the impact and practical application of smart contracts. It also provides a platform for legal experts, technologists, and academics to work together to develop frameworks that not only promote the implementation of smart contracts, but also increase the legal clarity and certainty needed for their widespread adoption and successful integration into existing legal and business structures.