A smart contract is a self-executing program that automates the actions required in an agreement or contract. Once completed, transactions are traceable and irreversible. Smart contracts are computer programs that run automatically as the parties to an agreement meet their terms. Based on blockchain technology, they are designed to transform the way we do business by eliminating the need to interpret contractual performance.
Smart contracts are contracts that are encrypted and stored on the blockchain. They automate agreements between the creator and the recipient, making them immutable and irreversible. Its main purpose is to automate the execution of an agreement without intermediaries, ensuring that all parties can confirm the conclusion instantly. In addition, they can be programmed to start a workflow depending on specific circumstances.
Arbitration would then be carried out automatically through the smart contract, either using a predetermined list of arbitrators specified by both parties, or a decentralized network of arbitrators. Smart contracts are not legal agreements, but rather means of fulfilling obligations derived from agreements that can be automatically executed by means of a computer program or a transaction protocol, such as technological means for automating payment obligations or obligations that consist of the transfer of tokens or cryptocurrencies. So what is an executed contract? A contract executed in terms of a smart contract refers to the successful completion of the agreement programmed in the smart contract. Here, once again, the objectivity required for the smart contract code might not reflect the reality of how contracting parties interact.
With blockchain security, smart contracts can be automatically executed, eliminating the need for supervision. As the adoption of blockchain spreads and as the number of assets that are tokenized or “become chains” increases, smart contracts will become increasingly complex and capable of managing sophisticated transactions. As a result, parties to smart contracts may find that the transaction costs of negotiating complex smart contracts exceed those of traditional text-based contracts. While in some ways this is the antithesis of the immutable and automated nature of smart contracts, it reflects the fact that smart contracts will only gain commercial acceptance if they reflect the business reality of how contracting parties act.
Arguably, one of the most popular implementations of blockchain technology and of smart contracts, in particular, lies within the supply chain. The second paradigm involves the use of smart contracts as vehicles to give effect to certain provisions of a traditional text-based contract, in which the text itself refers to the use of the smart contract to give effect to certain provisions. In addition, smart contracts are self-executing and non-negotiable, which can be inconvenient if the terms of the contract need to be changed due to unforeseen events. The term “smart contract” was first introduced by computer scientist and cryptographer Nick Szabo about 20 years ago as a graduate student at the University of Washington.
It's important that Szabo uses quotation marks around the word “smart” when comparing smart contracts to paper contracts, and that he avoids artificial intelligence. Some scholars have argued that the imperative or declarative nature of programming languages would affect the legal validity of smart contracts.