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Smart Contracts W3iplaw

What are Smart Contracts?

Blockchain is a technology that is built on Bitcoin and powers the world’s first decentralized currency. This type of technology is described as immutable, transparent, anonymous and decentralized. It is decentralized through the use of peer-to-peer technology to send payments or data between entities without the involvement of a bank or other financial institution. There is a difference between “blockchain” and “bitcoin”. Bitcoin is a digital currency that uses a distributed database technology to make it work. That is, a “chain of blocks” that store data for transactions where each block in the chain must be validated.

What is Blockchain Technology?

Blockchain is known as an online distributive system which can store information based on interconnected blocks which are open to everyone. It is a way to structure data in the form of a ledger that tracks accounting records. The series of blocks are linked to each other. The “blocks” are made up of digital pieces of information and the “chain” is the public database where these information blocks are stored.

Each block contains three parts.

  • Data in the block – information or the record of a transaction. Once information is stored it can no longer be erased;
  • Hash –the unique code that distinguishes one block from another. These are cryptographic codes created by special algorithms;
  • Hash of the previous block – each block within the blockchain is identified by a hash. When a unique code is created, a link to the previous block is also formed. A hash of the previous block is necessary in order for it to be linked or attached to the chain. Through this interconnection, one block has an impact on the next.

Nodes can be any kind of electronic device, such as a computer or a phone that is connected to the blockchain network. The nodes maintain copies of the blockchain and keep the network functioning. Each device in the blockchain network has a copy of the same blockchain. This means the information as it is spread across the network of computers cannot be hacked or manipulated. This is how blockchain is conveyed as a “distributive” ledger.

What is a Smart Contract?

Simply, a smart contract is a self-executing contract using computer protocol that automatically executes commercial transactions, enforces legal agreements or handles the transfer of assets or information between certain parties under specific conditions. This is possible because a programmer codes the terms of the contract using a computer language that makes the terms automatically enforceable by a protocol that all nodes in the network follow.

How does it Work?

A smart contract can be likened to a vending machine. In order to obtain a bar of chocolate, you need to insert $1 and press the 3C button. The vending machine technician does not need to be there to verify the transaction. Now, if you insert $1 into the vending machine but pressed 2C instead of 3C, you will not get the chocolate. You will also not get the chocolate if you pressed 3C but inserted less than 1$. If you do both actions correctly, it is impossible for the machine to decide by itself to charge you more or give you a can of soda instead. You must do exactly what is required in order for the machine to fulfill its end of the transaction.

Can a Smart Contract be Legally Enforceable?

In Australia, a smart contract can be legally enforceable if it fulfills the requirements of a formal contract which are offer and acceptance, consideration, and intention to be bound.

Since transactions in smart contracts are done automatically, it is possible that the parties may not be aware that the transaction is already taking place and therefore, that they never intended to be bound by the transaction. On the other hand, because the parties are aware of and understand the rules of the code, they are then bound to the transaction that is executed through the code.

Smart contracts can be used to facilitate the exchange of information, money and property. Currently, smart contracts are more focused on the trading of financial instruments.

What are the Main Benefits of Using Smart Contracts?

The smart contract benefits are as follows:

  • Autonomy – third party involvement is eliminated which makes the process decentralized
  • Accuracy – the terms and conditions are recorded explicitly
  • Transparency – chances of a dispute are eliminated when the terms and conditions are visible and accessible to all parties
  • High speed – smart contract transactions run on software codes and the execution of the transaction happens in real time
  • Data storage – a set of essential details are recorded for every transaction and get stored for future records permanently
  • Trust – transparency, security, autonomy with no possibility of manipulation, bias, or error
  • Cost savings – costs associated with the implementation of transactions are eliminated through automation of tasks and removal of third-party intermediaries
  • Robust backup – smart contracts replicate all transactions, and, therefore, the parties have a copy the transactions even when data storage of a device fails.

Are there Limitations in the use of Smart Contracts?

Large amounts of code are needed in order to create a smart contract. A smart contract is only as good as the data it acts on. The slightest error can be expensive and time-consuming to correct once the smart contract is sent to execute. To address this, developers put in place a process which both parties have agreed overrides the smart contract with a new version. Additional code is created in order to make the replacement smart contract sit alongside the original one and ensures that all inputs into the original smart contract also flow to the replacement.

Takeaway Points:

  • Blockchain technology provides for a more secure, unchangeable platform with a permanent record of events
  • Smart contracts ensure data is impossible to forge or change.
  • A smart contract can be legally enforceable if it fulfills the requirements of a formal contract.
  • Smart contracts are “self-executing” and thereby eliminate the use of third-party intermediaries.
  • The use of smart contracts is limited to the trading of financial instruments and some online transactions.


Jaclyn-Mae Floro, BCompSc

Contact W3IP Law on 1300 776 614 or 0451 951 528 for more information about any of our services or get in touch at
Disclaimer. The material in this post represents general information only and should not be taken to be legal advice.

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