Smart Contracts: Understanding the Legal Implications of Self-Executing Contracts on Blockchain

Contributor: Jesutofunmi Idowu

INTRODUCTION

Smart contracts are self-executing digital agreements written in code and executed on decentralized blockchain networks. Unlike traditional contracts, smart contracts operate without the need for intermediaries, offering greater efficiency, security, and transparency. Initially proposed by cryptographer Nick Szabo in the 1990s, the concept of smart contracts gained prominence with the advent of blockchain technology, particularly with platforms like Ethereum. These contracts automatically enforce the terms of an agreement once predefined conditions are met, reducing the need for human intervention and mitigating the risks of fraud, errors, and disputes. In the context of Nigeria, smart contracts are likely to be considered legally binding, although challenges related to enforceability, taxation, and data protection remain. Despite these obstacles, smart contracts hold immense potential for transforming industries like finance, insurance, supply chain management, and real estate. This article explores the features, evolution, legal considerations, advantages, and challenges of smart contracts in Nigeria, highlighting their potential impact on the legal industry and business transactions. The future of smart contracts in Nigeria depends on addressing existing legal uncertainties and the country’s cultural adaptation to technological advancements.

WHAT IS A SMART CONTRACT?

A Smart contract is a self-executing agreement between two or more parties that is directly written in code. Smart contracts exist on a decentralized blockchain network, meaning they are distributed and immutable^[1]. Simply put, smart contracts do not rely on 3^rd parties or intermediaries for their execution and enforcement. They simply carry out their predetermined terms automatically, without assistance. They are essentially like regular physical contracts, except that they are virtual; they are stored on a blockchain and they are written entirely in code^[2].

Smart contracts are created using programming languages like Solidity. They are built of codes and execute themselves just by looking at those codes. Code is the law in the world of smart contracts and they enable true transparency and control^[3]. An example of a smart contract is the Uber, Bolt ride or Indrive application, when you order a ride to a destination and you input your card details, the app automatically pays the driver when he gets to the destination, another example is the Netflix or Showmax App, when you subscribe and pay, the app automatically grants you access to watch movies and TV shows for a fixed period (e.g., 30 days). At the end of that period, access is automatically revoked unless the smart contract detects a renewal payment.

Furthermore, this type of contract differs from traditional legal contracts in terms of execution, technology, transparency, security (once deployed on a blockchain, smart contracts become temper-proof and resistant to unauthorized modifications), and flexibility, without the participation of any intermediary or loss of time^[4].

FEATURES OF A SMART CONTRACT

• They are self-executing: All the rules and agreements between parties in a transaction are stored as codes, and the contract automatically executes once the preset conditions are fulfilled.^[5]
• They possess blockchain qualities of being distributed: This simply means that all participants in the network have access to the same data, and any changes to the data are reflected on all nodes simultaneously.^[6]
• They are firm and irreversible: Once they are set up, the codes that make up a smart contract cannot be altered.^[7]
• The objective of a smart contract is the reduction of the need for trusted intermediaries, arbitration and enforcement costs, fraud losses, as well as the reduction of malicious and accidental exceptions.^[8]

UNDERSTANDING SMART CONTRACTS AND THEIR EVOLUTION

The concept of a smart contract was initially proposed in the 1990s by computer scientist and cryptographer Nick Szabo, who had previously worked on digital money and protocols^[9].

According to his definition, smart contracts are digital protocols that facilitate the exchange of information over computer networks by executing transactions and establishing secure connections via mathematical procedures^[10].

Szabo was interested in creating legal and associated contracts that enable e-commerce protocols, thus he described them as a mix of computer programs that help with certain applications and activities like credit and payment systems and contracting that are secured by cryptography.

Given the dominance of traditional financial services, Szabo’s ideas at the time looked unachievable because the necessary technology was not in place to carry them out at that time^[11].

Another reason the smart contract concept seemed like an impossible fit at the time was the fact that before blockchain was used to make smart contracts, the smart contract concept stood the risk of being breached from the central point of control and several other limitations that came with it, as such, the efficiency and flexibility of the smart contracts was questioned.

Following the revolution in Blockchain technology, 2008 saw the appearance of Bitcoin, the first successful cryptocurrency in the blockchain space. Bitcoin was not the first attempt at creating digital currency, but it was the first to allow users to perform a peer-to-peer that was secure and decentralized.

The technique used in Bitcoin transactions bore a remarkable resemblance to the ideas that Szabo had discussed back in the early 1990s. “Smart contracts” refers to these code sets that were utilized to carry out the transactions.^[12]

Although Bitcoin had certain restrictions when it first launched, such as the inability to have a decentralized ledger and the inability to complete transactions in a fresh block, its debut signalled the start of a new era for smart contracts.

The rise of cryptocurrencies coincided with the exponential growth of smart contracts, yet Szabo’s goal remained unfulfilled. Despite the optimism it offered, the notion of smart contracts came about even if its use on Blockchain was restricted. After a few years, the Ethereum blockchain was introduced, which gave smart contracts the boost in popularity they needed. With Ethereum’s perfect technological framework, smart contracts could now be used in real-world scenarios.^[13]

Unlike the original Blockchain platform, Bitcoin, the Ethereum platform features an architectural design with several levels that enable and reinforce new business opportunities. Because of its programmability, smart contracts may be used and accessed more quickly, easily, transparently, and securely than traditional contracts, possibly even replacing them.

HOW SMART CONTRACTS WORK

The working methodology of smart contracts is based on blockchain technology. The blockchain is the underlying technology that facilitates transacting in cryptocurrencies like Bitcoin.^[14] Blockchain can be defined as a public ledger that records all the transactions and each block of transaction connects to another block to form a chain automatically executed by a computer program. The transactions recorded are publicly available for verification and thus when a transaction happens, the smart contract runs, checks the conditions in the contract, and does the required action without needing the assistance of a middleman.

Smart contracts have the potential to revolutionize how businesses interact with customers and suppliers. By automating contract execution and management, smart contracts can reduce costs and speed up transactions. In addition, smart contracts can help reduce the risk of fraud and errors, as well as provide greater transparency and auditability.^[15]

SMART CONTRACTS UNDER NIGERIAN LAWS

Under Nigerian law, smart contracts are most likely to be considered legally binding agreements. As such, they are subject to the same rules and regulations as any other contract. This includes requirements for formation, such as offer, acceptance, capacity and consideration.

Out of curiosity, a question which comes to the mind of everyone here is “Whether smart contracts meet the requirement of contracts ‘in writing^[16]”:

Although a contract need not be in writing to be enforceable in Nigeria, certain contracts are specifically required to be in writing or evidenced in writing; otherwise, they are unenforceable. Under the Statute of Frauds 1677 – an English law which applies in Nigeria – the following contracts must be in writing^[17]:

• arbitration agreements;
• agreements between shipmasters and seamen;
• bills of exchange;
• bills of sale;
• contracts for hire purchase;
• declaration of trusts in respect of land and dispositions of interests in land;
• legal practitioners’ agreements with clients for remuneration, etc.

One legal issue that may thus arise is whether a source code or object code used in writing a smart contract constitutes a contract in writing. Nigerian Courts may reasonably treat the source codes or object codes behind smart contracts as meeting the requirement for a contract in writing – as long as such codes are written representations in a medium of expression, whether understandable or not – if they are decodable or interpretable terms of the contract between the parties^[18].

However, the provisions of the law such as Section 84 of the Evidence Act, Section 93 (3) of the Evidence Act 2011, and Section 17 Of the Cybercrimes Act 2015, which legitimize electronic contracts can regulate smart contract transactions, as well as the Nigerian Data Protection Act 2023.

ADVANTAGES AND DISADVANTAGES OF SMART CONTRACTS

ADVANTAGES

• One of the advantages of smart contracts is that it has been proven repeatedly that they are the fastest and safest way to conclude a transaction.
• Also, the automation and efficiency of smart contracts reduce the need for intermediaries, streamline processes, and accelerate contract execution, making the transaction more efficient. When predefined conditions are met, the contract executes without external intervention. This can ensure that parties comply with agreed-upon terms.^[19]
• Cost-reduction: By eliminating intermediaries, administrative overheads, and manual processes, smart contracts can significantly reduce the cost associated with contract management and enforcement.
• Transparency and Trust: Smart contracts are stored on a blockchain, providing a transparent and immutable record of all contract actions. This transparency enhances trust between parties. Smart contracts execute precisely as programmed.^[20]
• Global accessibility: Smart Contracts are digital and executed over the Internet. This will enable parties from around the world to engage in agreements without geographical barriers.

DISADVANTAGES

While there is no specific legal framework for smart contracts in Nigeria yet, the courts have generally been receptive to technology-driven solutions. However, there are some challenges that need to be considered when using smart contracts in blockchain transactions.

First, the enforceability of smart contracts is still an open question in Nigerian law. While there is precedent for the enforcement of digital agreements in other contexts, it is not clear how this would apply to smart contracts. This leaves room for interpretation by the courts, which could potentially lead to delays or even difficulties in enforcing smart contract terms^[21].

Another challenge relates to taxation. It is unclear how smart contracts will be treated for tax purposes in Nigeria. This could create uncertainty and confusion for businesses trying to use this technology for their transactions.

Finally, there is the issue of data protection. Smart contracts often involve the sharing of sensitive information, such as financial details or personal information. It is not clear how this data would be protected under Nigerian law, which could create risks for businesses and individuals using smart contracts^[22].

BENEFITS/ IMPORTANCE OF SMART CONTRACT TO THE LEGAL INDUSTRY

• Human intervention: Smart contracts are self-executing contracts; thus, execution of the contract terms – once automated – does not require human intervention, unlike traditional contracts.^[23]
• Trust and performance: Unlike traditional contracts, which are dependent on the parties’ trust in each other, the parties to a smart contract do not have to trust that each will perform the terms of the contract, because performance is premised on a computer program.
• Manual or electronic signatures: With smart contracts, the parties must execute the contract with their digital signatures – private keys. These replace regular manual or electronic signatures.^[24]
• Enforcement: Unlike traditional contracts, where the parties may rely on intermediaries or third parties such as mediators, arbitrators and judges for mediation, arbitration or adjudication regarding failure, neglect or refusal to perform a contract or any term thereof, smart contracts rely on self-enforcing codes.
• Paper or electronic contract documents: Smart contracts are codes and are recorded in a digital ledger, thus replacing paper or electronic documents.
• Improved transparency; All parties can view the terms and conditions of the contract at any time and this can improve trust between the parties and reduce the likelihood of disputes.^[25]

EXAMPLES OF SMART CONTRACTS IN THE LEGAL INDUSTRY (LIFE EXAMPLES)

1. Decentralized Finance (DeFi) Applications: Smart contracts are being used extensively in DeFi applications for lending, borrowing, and trading cryptocurrencies. For example, for loan app users, upon applying and qualifying for a loan, the money is sent to the user’s account automatically, and repayment terms (like interest, due dates, and penalties) are enforced by the contract. If there is a delay in repayment, the system may automatically deduct the borrowed sum from the user’s linked account or reduce the user’s credit score.
2. Supply Chain Management: Smart contracts can be used to track the movement of goods from their origin to their final destination. For example, Jumia, Temu and other similar apps use smart contracts to track the origin and safety of their products.^[26]
3. Insurance: Smart contracts can be used to automate the claims process for insurance policies.
4. Voting Systems: Smart contracts can be used to create transparent and secure voting systems. For example, the USA “Follow My Vote” concept is a blockchain-based voting platform that uses smart contracts to ensure the integrity of the voting process.
5. Real Estate: Smart contracts can be used to automate the transfer of property ownership. For example, Propvat is a real estate platform that uses smart contracts to streamline the buying and selling of properties.^[27]

FUTURE TRENDS AND DEVELOPMENTS

The legal system might have to change as smart contracts advance in order to make room for them. The obstacles that legal frameworks may need to solve include its enforcement, legal remedies in the event of disputes, and concerns pertaining to coding faults or vulnerabilities. In the future, it may be possible to mix the traditional legal language with smart contract code to take advantage of automation and transparency.^[28]

CONCLUSION

In conclusion, this discussion highlights the urgent need to raise technological awareness in our society, particularly regarding the limited research and practical understanding of smart contracts within the context of developing countries like Nigeria.

For Lawyers, this presents both a responsibility and an opportunity. It is no longer sufficient to observe the potential of innovations such as smart contracts from the sidelines. It is important to actively engage with these tools, to help shape their implementation, and to contribute to building a more transparent, efficient, and trusted framework for contractual relationships in Nigeria.

REFERENCE

1. Erika Rasure Suzanne Kvilhaug What Are Smart Contracts on the Blockchain and How Do They Work? June 12 2024 mailto:https://www.investopedia.com/terms/s/smart-contracts.asp accessed on 6th May 2025. ↑
2. IBM What is Smart Contract on Blockchain? mailto:https://www.ibm.com/think/topics/smart-contracts 2 May 2025 mailto:https://www.ibm.com/think/topics/smart-contracts 6th May 2025. ↑
3. Deric Cheng Wed3 University What are Smart Contracts? mailto:https://www.web3.university/tracks/create-a-smart-contract/what-are-smart-contracts Accessed 6th May 2025 ↑
4. Dev Education at web3U Ibid ↑
5. 3 Famous Smart Contract Hacks You Should Know.” Medium, Firmo Network, 29 Apr. 2018, medium.com/firmonetwork/3-famous-smart-contract-hacks-you-should-know-dffa6b934750 Accessed 6^th May 2025. ↑
6. Scalable Smart Contracts and Their Characteristics April 7 2021 mailto:https://old.scalablesolutions.io/news/smart-contracts-and-their-characteristics/ Accessed 6^th May 2025. ↑
7. True Tamplaim Smart Contract on Blockchain 8 September 2023 mailto:https://old.scalablesolutions.io/news/smart-contracts-and-their-characteristics/ Accessed 6^th May 2025. ↑
8. True Tamplain Ibid ↑
9. Future Learn What are Smart Contract Used For? mailto:https://www.futurelearn.com/info/courses/defi-exploring-decentralised-finance-with-blockchain-technologies/0/steps/251885 6th May 2025 ↑
10. Future Learn Ibid ↑
11. Internet Policy Review Chris Wray, Legal Graph Company Limited, Giovanni Sileno , University of Amsterdam 18 November 2020.mailto:https://policyreview.info/open-abstracts/smart-contracts Accessed 6^th May 2025. ↑
12. Tatiana Revoerdo Medium Smart Contracts in a nutshell 19 December 2023 mailto:https://tatianarevoredo.medium.com/smart-contracts-in-a-nutshell-0e75a920e76a Accessed 6th May 2025 ↑
13. True Value Meters, Smart Contracts: Building Blocks for Digital Markets. 25 January 2018 mailto:Smart Contracts: Building Blocks for Digital Markets Accessed 6^th May 2025. ↑
14. Erika Rasure Suzanne Kvilhaug What Are Smart Contracts on the Blockchain and How Do They Work? June 12 2024 mailto:https://www.investopedia.com/terms/s/smart-contracts.asp Accessed on 6th May 2025. ↑
15. MoonPay What Are Smart Contracts and How Do They Work 12 December 2023 mailto:https://www.moonpay.com/learn/blockchain/what-are-smart-contracts Accessed 6th May 2025. ↑
16. Ajibola Akamo Nigeria’s Crypto Heavyweights React to New Sec Regulation on Digital Currencies 18 May 2022 mailto:https://nairametrics.com/2022/05/18/nigerian-crypto-community-react-to-secs-new-digital-asset-regulation/ Accessed 7^th May 2025. ↑
17. Tega Edema, Contract Law in an Era of Technology: Examining Liability in Smart Contract Transactions mailto:file:///C:/Users/HP.DESKTOP-2BS8M4Q/Downloads/iaolubiyi,+218-Article+Text-1065-1-6-20230818.pdf Accessed 7^th May 2025. ↑
18. KristianLauslahti and JuriMattila and TimoSeppälä, ‘Smart Contracts – How will Blockchain Technology Affect Contractual Practices?’ ETLA Reports (2017) 68 mailto:<https://www.etla.fi/wp-content/uploads/ETLA-Raportit-Reports-68.pdf> Accessed 7^th May 2025 ↑
19. Alexandros A. Papantoniou Digital Law Journal Smart Contracts in the New Era of Contract Law Digital Law Journal (2020) (1) 4 mailto:https://www.digitallawjournal.org/jour/article/view/30?locale=en_US Accessed 7^th May 2025 ↑
20. Dimitrios Roumpos, ‘Liability of the Smart Contract Developer: A Comparative Analysis in the light of US and EU Law’, (2020) being a Masters Thesis submitted to the University of Tilburgmailto:Dimitrios Roumpos, ‘Liability of the Smart Contract Developer: A Comparative Accessed 7^th May 2025 ↑
21. Alexander Savelyev, ‘Contract law 2.0: Smart Contracts as the Beginning of the end of Classic

    Contract Law’ Information and Communications TechnologyLaw, (2017) 26(2), 116–134.

    mailto:<https://doi.org/10.1080> Accessed 6 May 2025. ↑

22. Mateja Durovic and Andre Janssen,‘The Formation of Smart Contracts and Beyond: Shaking

    The Fundamentals of Contract Law? mailto:https://www.researchgate.net/publication/327732 Accessed 7th May 2025 ↑

23. John Salmon and Gordon Myers, ‘Blockchain and Associated Legal Issues for Emerging Marketsmailto:John Salmon and Gordon Myers, ‘Blockchain and Associated Legal Issues for Accessed 7^th May 2025. ↑
24. Ibid ↑
25. Laura Shin points to Toby Hoenisch as the possible hacker. See, Laura Shin, ‘Exclusive: Austrian Programmer and Ex Crypto CEO Likely Stole $11 Billion of Ether’ Forbes mailto:https://www.forbes.com/sites/laurashin/2022/02/22/exclusive Accessed 7th May 2025 ↑
26. Ibid ↑
27. Sir GeofreyVos, ‘The Launch of the Legal Statement on the Status of Cryptoassets and Smart Contracts mailto:https://www.judiciary.uk/wpcontent/uploads/2019/11/LegalStatementLaunch.GV_.2-1.pdf Accessed 7th May 2025. ↑
28. Ibid ↑