What Lawyers Should Know About Smart Contracts in 2023

From contract management to AI, legal teams are embracing the digital revolution of modern businesses. So many tools that can help legal make light work of their overburdened to-do list are cropping up on the market, and savvy legal teams are adopting them with increasing frequency.

Smart contracts are one of the tech developments that legal teams are evaluating in an effort to do more with less. There is a fair amount of skepticism around these contracts, and some lawyers worry that smart contracts will make their jobs obsolete.

Like AI, smart contracts can only work well when humans are part of their execution process. And while smart contracts might not be helpful for every use case, there are a few ways they can help reduce legal workload and improve workflows in 2023.

What Is a Smart Contract?

A smart contract is a set of programmatic protocols that executes specific terms automatically when certain conditions are met. The term was coined back in 1998 by Nick Szabo, who defined a smart contract as “computerized transaction protocols that execute the terms of a contract.” 

Smart contracts are programmed using if/then logic according to the standards of the contract programmer. For example, if money is received by a specific date, then goods are delivered. And since smart contracts are built using blockchain technology, the “terms” cannot be changed once the contract has been executed. 

To execute a smart contract, creators must pay a fee (known as “gas”) to add it to the blockchain. The more complex the agreement, the higher the fee.

Are Smart Contracts Legal?

Yes and no. First, without the three standard components of a contract — offer, consideration, and acceptance — a contract cannot be considered valid. Since smart contracts are just lines of code, they don’t always include every component needed for a valid contract.

Additionally, unlike traditional contracts, smart contracts don’t include the typical legal terms of an agreement. Since these are programmatic transaction protocols, smart contracts are often only lines of code that outline the conditions that must be met for the contract to be executed.

Smart contracts, while not legally binding on their own, can be incorporated into traditional agreements as a way to execute terms when conditions are met automatically. 

What Does This Mean for Lawyers in 2023?

Smart contracts are gaining steam in the legal industry. Their ability to automate contract execution workflows and remove the headache of ensuring contract fulfillment makes them a great addition to legal’s tech ecosystem.

It’s important to note that smart contracts are immutable, and complex smart contracts can be expensive, as this is crucial to determining how well they would fit into your legal processes. Though legal teams tend to lack the specialized skills needed to encode a smart contract, it’s an excellent opportunity for cross-functional collaboration with engineering and development.

In-house legal teams, especially those trying to work smarter, not harder, should keep an eye on developments in this space, as well as cryptocurrency and the blockchain, and how it will inevitably change the way legal works. 

Takeaways

Smart contracts are future-forward ways that legal teams can automate and execute parts of the contract process. While they are not suitable replacements for traditional contracts, they can all work together to streamline the contract process and the legal function in general.