“Smart Contracts” Are Mostly Obtuse

One of the Trump administration’s very first executive orders (No. 14178), issued January 23, 2025, titled “Strengthening American Leadership in Digital Financial Technology,” was aimed at promoting the United States as a leader in digital assets and financial technology. It discussed specifically the use of public blockchain networks. Although most people think of digital assets and blockchains as cryptocurrency, there is another side to blockchain. Blockchains like Ethereum and Solana are programmable and, as such, can be used for automation of business processes via “smart contracts.”

Because many blockchains are public, tools can measure the amount of smart contract activity. Based on raw numbers, the Ethereum blockchain has the most active smart contracts of the public blockchains, with more than 90 million smart contracts in use. That number is rapidly growing, with millions of new smart contracts being deployed each quarter. Tokenization, layer-2 blockchain activity, and the expanding use of decentralized finance are all fueling the growth of the smart contract ecosystem. 

As with any technology, smart contracts have created new challenges. The law in this area is in its infancy, and interpretive issues surrounding smart contracts will likely be central to the case law as it develops. Supplementing a smart contract with a legally binding agreement written in human-readable language (a “natural language contract”) might be the best way to help mitigate potential problems with enforceability, ensure clarity of intentions and duties of the parties involved, and allow for needed flexibility for drafters.

To be clear, smart contracts are not the same as written contracts. Rather, smart contracts are programs designed to automate processes that are self-executing, coded in a computer language, on a digital ledger called a blockchain. The program will take predefined actions when contingencies outlined in the code are met. The blockchain then logs the data showing the events and actions that have taken place. The data “on-chain” is cryptographically linked, immutable, and validated by a consensus of computers on the blockchain before it is added as a new block. A better name for these arrangements might be “automatically executing terms and conditions,” as it highlights that these programs are rigid and can only execute predefined instructions for situations contemplated when creating the terms of the smart contract. For example, if any contingency is not considered and coded, a smart contract cannot address it.

Advocates of smart contracts point to several benefits. Use cases show that automation can make processes much faster. Because these transactions often automate manual processes, there is usually a resulting cost reduction. Using a public blockchain like Ethereum or Solana for a smart contract allows the recorded data to be accessed by anyone, which can increase trust by creating transparency and ensuring all sides are working with the same information. Another potential upside is that, because there are no humans involved in actual execution as contingencies are met, the smart contract should be less prone to error.

As an example, imagine a smart contract that would automate payment of invoices for goods. The smart contract would record invoices on a blockchain and could pay vendors automatically once it confirmed delivery. Because a blockchain is programmable, it can look at an external source called an oracle to collect existing data. In the example, the oracle could be a tracking system from a delivery service. Once receipt of the shipment is confirmed by the program, the condition for payment is met. The contract could then send an ACH payment directly to the vendor’s bank account, or even a cryptocurrency payment to the vendor’s digital wallet for the goods received.

Already several companies are trying to shake up invoicing and payments by using smart contract and blockchain technologies. These simple smart contracts function well; however, there may still be problems where contracts are more complex. Smart contracts do not handle complexity or abstract concepts as well. Some state legislatures, looking to encourage business in their states, have created laws governing smart contracts.

Multiple states have passed legislation authorizing the use of smart contracts in commercial contexts. For example, Arizona in 2017 passed legislation stating that smart contracts, where records and signatures are secured by blockchain, cannot be denied validity solely because they are based on blockchain. Vermont passed legislation in 2018 creating a new corporate structure for companies primarily offering blockchain services, which grants them the ability to use smart contracts in various aspects of their corporate governance, such as voting procedures. Illinois, in 2020, created a statewide framework for smart contracts that similarly recognizes the legal effect of smart contracts so long as they comply with contract law; however, unlike other states, the legislation imposed various limitations. Specifically, the limitations relate to when a contract could be denied legal effect, and the law prohibits local governments from taxing or imposing other restrictions on smart contracts.

The House also passed legislation addressing blockchain technology. The Deploying American Blockchains Act of 2025 seeks to have the U.S. Department of Commerce support U.S. leadership in the deployment and use of blockchain technology, applications built on blockchain, and tokenization. It provides for the formation of advisory committees to develop “best practices” for the use of blockchain technology and its applications, such as tokens and tokenization. Courts have weighed in on various issues regarding the status of blockchains; however, none of these laws or cases resolve the problems of interpretation that arise from the smart contracts written in code.

Smart contracts still must comply with basic tenets of contract law, and for any contract to be enforceable, parties must have an offer and acceptance. One could argue that unless both agreeing parties can read the computer code, the terms are not defined, and therefore consenting is impossible, as there is no “meeting of the minds.” We can look to the browsewrap and clickwrap contracts for guidance on how courts might treat these issues.

With a browsewrap contract, the terms and conditions may be available via a hyperlink or otherwise, but there is no explicit user assent. Courts have been hesitant to enforce browsewrap contracts due to insufficient evidence to establish constructive or actual notice of the terms. For example, in Nguyen v. Barnes & Noble Inc., the court found that terms of use, including an arbitration agreement posted at the bottom of the store’s website, were insufficient to compel arbitration because notice was inadequate.

Compare this to clickwrap agreements, which require an individual to take an affirmative action, like checking an “I agree” box after being presented with contract terms. Courts have based enforceability of such contracts on the clarity and conspicuousness of the terms. In B.D. v. Blizzard Entertainment Inc., the court enforced an arbitration agreement displayed in a text box, where the immediately visible portion of the terms stated that users could not use the service if they did not agree to all terms of the licensing agreement, along with a statement that users should read the dispute resolution clause below because it would affect their legal rights.

It is easy to imagine a fully coded smart contract being treated in the same manner as a browsewrap contract. Given the need for clarity and assent, a hybrid contract that includes both a natural language portion and coded provisions may be a better option than a strictly smart contract. The natural language could provide a clear, readable record of parties’ intentions, while the contract could also be coded into the blockchain, allowing proof of assent to the terms. The natural language may also allow an arbitrator or court to assist in enforcing the intended terms.

In addition to confusion over what the contract’s terms are, smart contracts cannot integrate abstract concepts like “best efforts,” “commercially reasonable efforts,” or “good faith and fair dealing.” These concepts are all subject to interpretation. A smart contract cannot interpret words; it can only perform tasks contemplated upon the occurrence of a definable contingency.

With a hybrid (natural language and smart) contract, one gets the best of both worlds. That combination allows for abstract concepts like best efforts, which cannot be addressed by computer code. It can include dispute resolution, forum selection, and other standard contract terms. A hybrid contract allows for efficient, automated execution of clear, rules-based functions, while retaining the main functions of contract law.

Accordingly, regardless of where one stands on cryptocurrency, blockchain’s potential with regard to smart contracts should be central to any strategy to achieve the president’s promise of becoming the “crypto capital of the world.”