Smart Contracts: What are they exactly? What is their nature, philosophy, and inspiring principles?

When defining and conceptualizing Smart Contracts, it is important to bear in mind that they do not stem from jurisprudential developments or parliamentary initiatives, but rather from the disruptive Blockchain technology. Thus, their dissociation from elements originating in other disciplines such as computer science becomes quite complex. Likewise, translating the anglicism literally is not advisable, since, akin to false friends, Smart Contracts do not necessarily involve a contract, let alone an intelligent one.

Referring first to the concept provided by its intellectual author, Nick Szabo, we could consider them as "a set of digitally determined promises, including protocols within which the parties perform these promises" (SZABO, 1996, p.1). As evident, this is a broad definition highlighting the necessity to specify certain conditions—hence the current reference to the "if...then" clause representing its operation—digitally supported with configured protocols for their execution.

From a legal perspective, it is relevant to consider whether Smart Contracts qualify as contracts. International authors define them as "programmable contracts capable of self-executing when predefined conditions are met" (EZE, 2018, p.538). Spanish authoritative doctrine also conceptualizes them as "computer programs that enable the verification, execution, and application of stipulations within a contractual agreement" (BARRIO ANDRÉS, 2020, p.83). Some authors caution that the term "contract" in this context is commonly used in a "informal" or "loose" manner, diverging from the traditional meaning of contract (MIK, 2017, p.4). Instead of strictly linking it to a contract, some propose it as an "advanced form of electronic business" (IBAÑEZ JIMÉNEZ, 2018, p.8).

Given the above, it may be prudent to start from more neutral and less restrictive definitions that, even from a legal standpoint, acknowledge their inherent digital nature. Thus, we could define them as computer programs that execute instructions, previously inserted in code or machine language, automatically upon the occurrence of a specified term or condition (GIMENO BEVIA, 2020, p.4).

What are Smart Contracts - exactly?

Beyond their conceptual delineation, what is crucial for considering an agreement as a contract is the presence of the requisites contemplated in article 1261: consent, object, and cause. Therefore, for a Smart Contract—setting aside its inaccurate translation—to be considered a contract, it must fulfill the inherent requirements of contracts. Conversely, for a contract to be considered a Smart Contract, it must also meet the essential characteristics thereof, namely digital format, in code or machine language, self-execution, immutability, and deployment on a decentralized ledger.

Consequently, if both aspects are not recognized, the legal business will differ from a contract. However, is it really relevant for a Smart Contract to be a contract? It is relevant if legal effects are intended for the Smart Contract. While a contract, as a generator of rights and obligations, is legally binding, a Smart Contract, on the other hand, may or may not be. In the virtual world, not everything that happens has legal backing or, in the event of a conflict, is resolved through jurisdiction. Faced with this dichotomy, internationally known as "Code vs Contract," the possibility arises of creating two categories distinguishing Smart Contracts that are "purely code" or computational, from those that could indeed constitute legally binding contracts, also known as Smart Legal Contracts. Spanish doctrine seems to reflect some consensus in considering that Smart Contracts do not per se represent a new form of contract, but rather a new way to instrument them, enabling the self-execution of programmed will agreements through code, thanks to Blockchain technology (QUINTANA CORTÉS, 2020, p.160).

What is their nature, philosophy, and inspiring principles?

Among their main characteristics, the following stand out:

1. a) Self-execution: Despite provisions in the Civil Code (e.g., arts. 1091, 1258), one of the main concerns—and risks—when entering into a contract is distrust towards the counterparty regarding possible breach. Indeed, the contract as a legally binding instrument precisely exists to allow individuals (natural or legal) to contract without needing to know each other, and to enable its content to be enforceable in case of breach through legal recourse. However, the fear of breach dissipates with a Smart Contract. This is because if predefined conditions are met, its execution, following the "if...then" mechanics, is automatic, as the characteristic implying their consideration as "intelligent" lies in their ability to execute by themselves and on their own terms. Indeed, these contracts act according to instructions provided in the code, reacting to input data that provides necessary information, and responding with specific output. In essence, the code performs actions instead of a human, understanding how and when to act.
2. b) Immutability: However, the self-execution of the contract on its own terms has a dual nature; its advantages also entail disadvantages. On the one hand, it guarantees that what is agreed cannot be altered. On the other hand, such automatism in execution prevents considering events that could alter or prevent the contractual relationship. Hence, another essential characteristic—its counterpart—is immutability. Indeed, immutability implies the impossibility of change, whether voluntary or not, once the Smart Contract is executed. This is because smart contracts eliminate the ambiguity of natural language, which, in certain cases, may limit their utility, leading parties to prefer the flexibility of legal contracts over the rigidity of automated computer programs.
3. c) Machine language: Another peculiar aspect of Smart Contracts lies in the language used for their drafting or programming. Despite the real-world effects of Smart Contracts, their configuration and development occur in the virtual world. Therefore, beyond the prior existence of a contract, whether written or verbal, as noted by SZABO, the Smart Contract must be specified digitally. Given that machine language is often complex—even unintelligible—to non-programmers, it is crucial that previously coded conditions have a prior documentary backup in natural language, meaning there should be a document containing the conditions agreed upon by the parties, subsequently verifiable for correct coding of the agreement.
4. d) Absence or limitation of central authority: One of the core tenets of Blockchain technology, on which Smart Contracts rely, is the absence or limitation of intermediation or central authority. Indeed, network users themselves verify, validate, and execute operations based on DLT (Distributed Ledger Technology), without needing a third party or central authority to carry it out. However, this characteristic is generally modifiable because this technology is also utilized by enterprises, and Smart Contracts are often deployed in permissioned networks or environments, where consortium or network members exercise some control (e.g., determining who can participate in the blockchain and to what extent). This structure provides an intermediary ground, leveraging the technological benefits of blockchains and decentralization while maintaining a secure and reliable business framework.
5. e) Transparency: Smart Contracts unfold their effects in trusted environments since the agreed-upon information is visible and verifiable by participants in the Blockchain network. Therefore, transparency operates as a fundamental and distinctive element of this technology, generating trust among users who can review the proper development of operations. It is important to note that transparency, as an inherent characteristic of these smart contracts, may be nuanced or attenuated based on whether they are developed in a public, semi-public, or private environment. However, transparency in its sense as a Blockchain and, hence, Smart Contract characteristic is not only linked to the environment or network in which it operates but also to the complete traceability of data throughout the process. Thus, due to Blockchain's immutability, it can be reviewed to assess whether it executed as agreed.
6. f) The importance of oracles: Oracles can be defined as the link or bridge between the Smart Contract and the external world. Often, Smart Contracts require specific information or external data for their proper deployment. For example, for an insurance company to release compensation due to a flight delay, the Smart Contract must access global air traffic databases to verify if the delay exceeds the specified limit. Another illustrative example is decentralized applications (DApps) that allow making predictions or bets of any kind, where payment is released upon the occurrence of the predicted outcome. This external information is provided through oracles, playing a crucial role in the proper execution of Smart Contracts.

Conclusion

Having explained the concept, nature, and characteristics of this phenomenon, a final reflection is warranted. It is essential for Smart Contracts to converge with the law because neglecting highly advantageous technological advances for society—cost and time savings, transparency, trust, among many others—would be absurd. This does not seem far-fetched at all, as Smart Contracts are remarkably flexible instruments capable of accommodating various regulations without altering their nature. The key, as Anglo-Saxons would say, lies in bridging the gap between code and contract, seeking intermediate solutions that enable ultimate legal enforceability without sacrificing the benefits of their difficult-to-manipulate self-execution (automated tamper-proof execution). This is where many initiatives focusing on Smart Contracts converge, beginning to propose credible solutions, even in complex regulated environments such as the financial sector. Let us continue along this path.