Smart contracts are deterministic programmes that automate the performance of specified actions. They consist of self-executing smart contract code that automatically performs once predefined conditions (or triggers) are met (see Principle 2). While smart contracts can be (but are not always) legally enforceable, parties to a legally enforceable contract may be able to automate the performance of some (or all) of its terms through the use of smart contract code (thus forming a 'smart legal contract').
The classic analogy (or ‘primitive ancestor’) for a smart contract is that of a vending machine. Once money is deposited into the machine, the product is automatically dispensed. The process does not require human intervention and cannot be terminated once started. Moreover, the machine itself provides adequate security against theft (a locked cash container), meaning it can be reliably deployed in a range of environments.
It is the characteristics of automation and self-execution that allow parties to trust that a smart contract transaction will be performed, without the need for a centralised gatekeeper or external enforcement mechanism. Instead, trust is generated by the underlying smart contract code. This trust can reduce the transaction costs and risk of human error that are otherwise associated with monitoring and managing contractual performance, a benefit that can be realised at scale with highly repeatable agreements (e.g. standard insurance contracts).