Smart Contracts: What are they, and how do they integrate into contract law and a business’s toolkit?

By: Skylar Shafer

The legal world is coming to terms with a digital revolution, with several key advancements in areas such as transformers for language models (ChatGPT) and blockchain (cybersecurity and cryptocurrency). One byproduct of these advancements has been the introduction of smart contracts, particularly correlated with the introduction of blockchain. Smart contracts are self-executing pieces of software that automatically and autonomously implement contractual terms on a peer-to-peer and immutable basis, when certain conditions are met.[1] To simplify this definition, smart contracts are fully digital contracts, secured through blockchain technology, that automatically enact clauses of a contract based on digital inputs. For example, a smart contract could verify the transit of goods from one place to another using digital inputs such as GPS or official online documents, and then automatically making payment and fulfilling a contract based on the completion of those conditions. [2]

So where could these contracts be useful? Well, let’s consider the economic circumstances that might lead one to prefer smart contracts. If you were a business in the United States purchasing a giant shipment of steel for manufacturing purposes, you would likely prefer to handle the contract in a traditional matter, to make sure that the shipment is handled correctly. Especially if the shipment is one-off, the cost of handling it legally would likely be small compared to the benefit of the large shipment, and thus going the traditional way would likely not eat into your profit margins, or time, too much (relative to the size of the transaction itself).

But let’s say you buy small amounts of steel from 30 to 40 different producers in different places. In that case, the total cost of traditionally managing these contracts goes up significantly. Furthermore, the downside of any one producer not fulfilling their side of the bargain decreases, so less oversight and constant communication with each supplier is needed. Each time one of the shipments arrives at your factory, you scan the shipment in, entering it into the digital world. Then payment is automatically made, fulfilling the conditions of the digital contract.

These digital contracts reduce market friction and increase competition. That being said, to enact these smart contracts you need digital touchpoints. These are means of reliably and securely communicating with the digital world and the smart contracts themselves, which can be a barrier to entry.[3]

How do smart contracts fit into our legal system? Their place in the digital world makes it harder for them to be regulated, and there are cases of smart contracts being used in ways which violate traditional restrictions on foreign trade, or for money laundering.[4] Smart contracts are also not considered property when they are immutable, by which I mean they exist digitally and are unadjustable once created, even by the creators, and accessible by anybody with an internet connection. This makes them diverge legally from traditional contracts.[5] A mutable smart contract, in comparison, would be more similar in nature to a traditional contract, requiring offer, acceptance, and more communication.[6]

Both businesses and the attorneys who advise them are still figuring out how to fully integrate smart contracts into traditional structures of both business and law. They have a variety of uses and come in multiple forms. As the rules of how we can use them integrate further into traditional law, businesses may want to consider using smart contracts in certain situations, especially to increase efficiency and reduce economic friction, whether locally or internationally.

 

Link to image source: https://pixelplex.io/blog/smart-contract-use-cases/

 

[1] What are Smart Contracts on Blockchain?, IBM, https://www.ibm.com/think/topics/smart-contracts (last visited Sept. 27, 2025).

[2] Id.

[3] Id.

[4] Van Loon v. Dep’t of the Treasury, 122 F.4th 549, 549 (5th Cir. 2024).

[5] Id. at 565.

[6] Id. at 568.