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What are Smart Contracts and How Do They Work?

The legal industry cannot escape from increasing digitalization. As technology changes and innovates, lawyers and law firms will have to adapt to new processes. One of the aspects of law firms that is becoming increasingly digitized is contracts. From retainer agreements to business law to real estate, digital contracts – called Smart Contracts – are increasingly popular.

smart contracts

But what are Smart Contracts? How do they work? These are two questions that lawyers and clients often ask. As contracts become more digitized, it is important to understand the answers and how Smart Contracts could affect the practice of law.

What are Smart Contracts?

A Smart Contract is a contract that is automatically executed based on predetermined factors. Using the power of technology, the contract is directly written into code, which is then recorded in a blockchain network. Because Smart Contracts are held in the blockchain, there is no intermediary or central authority that governs the contract transaction. Instead, the source code controls execution. Unlike traditional contracts, Smart Contracts allow anonymous parties to enter a contract.

How do Smart Contracts Work?

Like other assets held in the blockchain, Smart Contracts are permanent and cannot be changed. They are also transparent and traceable. This provides a high level of digital security. These contracts are also viewed as being reliable because the code operates based on a set of rules. The contract itself ensures that the rules are met.

Pros and Cons

There are many positive aspects of Smart Contracts, many of which are already being heralded by the supply chain industry and many businesses. For lawyers and law firms, the potential benefits include an automated process that saves time and money. Customized, automated contracts could relieve some of the costs of lawyer fees and administrative costs for the firm. The transparency and traceability of these contracts are also appealing so that products or services can be tracked routinely.  

The potential downsides to Smart Contracts mostly boil down to the automation of the contract. For example, informed consent can be questioned due to the opacity of the source code being used. The automated and digital nature also raises questions about evidential value. Smart Contracts do not require written, hardcopy proof of the agreement, rights, or obligations of either party.

With anything that is new in the digital age, there are also some general concerns about how accessible Smart Contracts will be for the everyday lawyer. Many lawyers and law firms do not have the technical and digital know-how to navigate potential issues with digital assets.


There is no question that our society, including the legal industry, is becoming more digitized. For lawyers and law firms, the question is how digitization factors into their future marketing plans, growth, and practice. With all the potential benefits of Smart Contracts comes the inevitable learning curve that many lawyers will find difficult to overcome. That’s why organizations like Web3 Law Center are here to help.

At Web3 Law Center, our goal is to help upcoming and current lawyers get ahead of the learning curve by learning useful tools and relevant trends in web3 and emerging technologies. If you want to learn more about web3 tools, blockchain technology, or Smart Contracts, join us today!