What is a Smart Contract?

Smart contracts are self-executing transactions that are written in computer code often utilized to “facilitate, execute, and enforce agreements between two or more parties.”1 While the term might sound new to some, the phrase was actually coined in 1994.2 The concept behind a smart contract is rooted in basic contract law; offer, acceptance, and consideration are all necessary, but smart contracts are enforced by different means. A key advantage of using smart contracts is efficiency. Once uploaded to the blockchain, smart contracts do not rely on a third party for recordkeeping or enforcement.3 Because they are self-executing and stored on a shared platform, smart contracts could potentially eliminate the manual effort currently necessary to execute domestic and international financial transactions.4

Because there is no reliance on a third party, smart contracts allow entities or individuals to enter into “trustless” transactions with ease.5 The word “trustless” is included because of the self-executing nature of the transaction. A person or group of people is not needed to verify that a transaction has taken place. Instead, all nodes involved in a transaction verify that each signature is valid before accepting the transaction or discarding the transaction if they are not.  The advancement of blockchain technology also allows for smart contract use internationally with limited logistical roadblocks, thus reducing transaction costs.

In practice, these contracts can be used in an incredibly diverse manner. In the banking industry, blockchain technology and smart contracts could replace the need for banks to store critical financial information of account holders and the need for banks to conduct and monitor automated transactions on behalf of customers, such as bill payments, wire transfers, and automatic deposits.6 Some in the banking industry believe the use of smart contracts and blockchain could reduce up to $20 billion in “middleman costs”. This is an enormous reason why UBS and Barclays are currently experimenting with the use of smart contracts and blockchain technology.7 Other industries that utilize smart contracts include life sciences and health care, supply-chain management, energy and resources, and identity management.8

Advancements in technology and the development of the “Internet of Things” has made blockchain technology and smart contracts more accessible than in the 90’s. As a result, two blockchain platforms, Ethereum and OpenLaw, have “hosted” lawyers to “create, deploy, and edit next-generation legal agreements relying on blockchain technology.”9 The appeal of smart contracts is likely to expand in the future as the demand for automated performance increases.10 One thing is certain; smart contracts are being used more often and gaining popularity. This will undoubtedly lead to regulators becoming more involved in the use of smart contracts beginning this year.11

1 See Szabo, Nick, The Idea of Smart Contracts (1997), http://szabo.best.vwh.net/smart_contrncts_idca.html).
2 Id.
3 Rachel Epstein, “Smart Securities” and the Future of Securities Regulation, 90-FEB N.Y. St. B.J. 34 (2018).
4 21 N.C. Banking Inst. 177.
5 Rachel Epstein, “Smart Securities” and the Future of Securities Regulation, 90-FEB N.Y. St. B.J. 34 (2018).
6 Banking is Only the Beginning: 36 Big Industries Blockchain Could Transform (2018).
https://www.cbinsights.com/research/industries-disrupted-blockchain.
7 Id.
8 Rachel Epstein, “Smart Securities” and the Future of Securities Regulation, 90-FEB N.Y. St. B.J. 34 (2018).
9 Susan George, Smart Contracts, 81 Tex. B.J. 403 (2018).
10 Id.
11 Stuart D. Levi, Blockchains Offer Revolutionary Potential in Fintech and Beyond, Practitioner Insights Commentaries, 2017 WL 954702 (2017).