What Is a Smart Contract?

What Is a Smart Contract?

A smart contract (or "self-executing contract," though this term is technically inaccurate) has recently emerged alongside blockchain as a key mechanism for automated contract execution.

Interestingly, the concept itself isn’t new. Nick Szabo introduced the term "smart contract" in the 1990s as a framework for automating computerized agreements.

Applications of Smart Contracts: Blockchain and Business

Popular perception ties smart contracts to blockchain and cryptocurrency—largely due to crypto transactions where a smart contract, accessing the seller’s crypto and the buyer’s fiat (though the latter isn’t always required), transfers funds automatically upon payment. This innovation bolstered trust in crypto transactions.

However, programs executing contractual terms predate blockchain. Examples include vending machines, automated document delivery services, or even taxi autopilots. Broadly speaking, smart contracts underpin countless "futuristic visions" of how service markets will evolve.

Fun fact: Russia’s Central Bank plans to integrate smart contracts into its digital ruble platform (digital ruble article). Worth watching!

Smart Contracts, Simplified

Who Executes a Smart Contract? Legal Perspectives

Some argue a smart contract is the agreement itself (e.g., a "self-executing contract"). I firmly disagree.

Legally, a contract is information or a fact, while a smart contract is the code executing it. Often, the contract terms are embedded in that code. Thus, a smart contract is a hybrid: the agreement (optional) + the executing program.

Can code be the contract? Unlikely. Here’s why:

1. The Language Problem

Programs use formal languages (precise, unambiguous). Contracts rely on natural language (flexible, interpretable)—a necessity for capturing nuanced human intent. Formal code strips contracts of this vital ambiguity.

2. The "Will" Problem

Contracts reflect mutual intent. But if parties can’t read the code (e.g., AI-driven contracts or obscured GUIs), how can it embody their will? A program isn’t intent—it’s a translation of intent into machine-readable terms.

Legal Status of Smart Contracts

In jurisdictions with freedom of contract (e.g., Russia, the U.S.), no special laws are needed to enable smart contracts. However, gaps exist:

1. Electronic Transaction Validity – Largely resolved in modern legal systems.

2. Code-as-Contract Recognition – Murky. Courts may default to oral agreement principles.

3. Irreversibility – Can execution be "rolled back"? Minimal precedent exists.

4. Validation – How to confirm performance? Parties should define this flexibly.

5. Program Legal Status – Vending machines aren’t regulated, but AI-driven contracts handling large sums? That’s uncharted territory.

Working with Smart Contracts: Recommendations

1. Draft a Separate Agreement – Define terms in natural language to avoid code-driven ambiguities. Non-compliant execution = breach.

2. Validate Performance – Establish auditable verification (e.g., protocol exchanges, signed acts).

3. Vet the Platform – Even blockchains can be fraudulent. Pre-audit contracts and the chain—some allow "oracles" to alter block data. Hacks happen (e.g., TheDAO, ByBit).

4. Plan for Errors – Define termination/reversal protocols for malfunctioning contracts.

Beyond Blockchain

While smart contracts gained traction via blockchain (solving trust issues in anonymous systems), they’re everywhere: from vending machines to AI. Their role will only expand.