Smart Contracts

 Jessica Schaedler, Back to basics: Smart contracts, STEP Journal (Vol31 Iss4), p.19

In 1994, the inventor of the ‘smart contract’, Nick Szabo,
defined the term as a ‘computerised transaction protocol that
executes the terms of a contract’. The transaction protocol
works with algorithms following an ‘if-then’ logic.
When we talk about smart contracts now, we refer to a
computer protocol run on a decentralised blockchain system,
usually the Ethereum blockchain, which allows automated
(i.e., self-executing) contract execution between two or more
parties with previously coded data. As with all data on a
blockchain, the distinct features and current legal limitations
of smart contracts are theoretical immutability, perpetuity,
decentralisation and encryption.
A smart contract is not a contract in the legal sense but
rather a computer ‘technology’ or a software for contract
execution and storage of data on the blockchain that takes on
the function of a transaction register. This understanding is
mostly shared by legal doctrine throughout the world.
Current fields of application for smart contracts include:
borrowing/lending, escrow or trading transactions in
decentralised finance (DeFi); creation and sale/purchase
of non-fungible tokens (NFTs) in the gaming industry;
and building and managing decentralised autonomous
organisations (DAOs).
Smart contracts come with legal challenges and limitations.
For example, the decentralised and immutable nature of
smart contracts poses questions concerning jurisdiction and
governing law. As these contracts are hosted on blockchain
networks that are globally distributed, it becomes difficult to
establish which national laws apply in the event of a dispute.
Another challenge is the legal recognition and enforcement
of smart contracts. For now, smart contracts (in most
jurisdictions) rely on ex ante formal legal contracts.
Moreover, the immutability of smart contracts raises
concerns about rectification and dispute resolution. Once a
smart contract is deployed on the blockchain, it cannot be
changed, which poses difficulties when programming, when
other errors occur or in the event of unforeseen circumstances.
Finally, building a legally binding contract on a blockchain,
even if it was possible under the law, could become a complex
endeavour. Since it is, by definition, self-executing, all
eventualities would have to be taken into account ex ante and
would have to be pre-programmed.
Legislators worldwide are actively exploring smart
contracts’ potential implementation and integration within legal
frameworks. It promises to be a captivating journey to observe
the forthcoming developments in this domain.
Part 4:
Smart
contracts
Jessica Schaedler TEP is Leading
Trust Advisor at Capital Trustees,
Zurich, and a member of the STEP
Digital Assets Global Special Interest
Group steering committee

https://www.step.org/step-journal/step-journal-issue-4-2023

https://www.capitaltrustees.swiss/wp-content/uploads/2023/09/Smart-contracts-STEP-Journal-Vol31-Iss4-p.19.pdf