Home blog newsA Look at the Potential Benefits and Risks of Smart Contracts

A Look at the Potential Benefits and Risks of Smart Contracts

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PUBLISHED

July 30, 2026

AUTHOR

Purdue Global Law School

The use of smart contracts is on the rise. Researchers expect the global market for smart contracts to see a compound annual growth rate of more than 82% through 2030. In 2025, smart contract platforms saw approximately 15 million active users and processed more than 100 million transactions each day.

In many ways, the term “smart contract” is a misnomer. It’s not really a legal instrument but a self-executing computer program. It cannot understand intent or adapt to unforeseen circumstances. Instead, it acts like an if/then workflow that automates the execution of legally binding terms based on data inputs.

A traditional legal contract outlines obligations and relies on a trusted third party or court system to enforce them. Smart contracts provide a secure, transparent, and tamper-proof method for recording transactions and enforcing agreements. However, errors in complex code, security vulnerabilities, enforceability issues, and regulatory uncertainty create a potentially treacherous terrain.

While smart contracts aren’t legal instruments in the traditional sense, they are impacting legal practice and the ways organizations engage with attorneys. Business leaders and legal counsel need to understand how they work and their benefits and risks.

What Are Smart Contracts?

Smart contracts are stored on a blockchain and run automatically when predetermined conditions are met. They follow a simple “if/when X occurs, then Y happens” logic:

Input: When a specific trigger occurs, the code activates.
Execution: A network of computers verifies and executes the action.
Finality: Once executed, the transaction is recorded on the blockchain, making it permanent and immutable.

A supply chain smart contract provides a useful example. A buyer and seller agree to terms for a shipment of medical supplies that must be kept at a controlled temperature. The buyer deposits $50,000 into a smart contract, which locks the funds in escrow. The supplier ships the goods on a pallet with a sensor that sends temperature readings to the cloud. When the shipment arrives, the dock manager scans a delivery QR code that transmits data to the blockchain. The contract verifies that the shipment arrived on time and remained cold. It then releases the $50,000 to the seller.

However, a smart contract is more than just a list of if/then rules. It stores certain information, such as an account balance or the current owner of an asset, and it performs various functions on that data. Some functions only read data (such as checking a balance), while others change the contract’s state (such as transferring funds).

Smart contracts use special rules to check preconditions and control access. For example, a “withdraw” function might have an access control that only allows the contract owner to use it. Events are notifications that the smart contract sends out to the network when an action is completed.

How Do Smart Contracts Operate?

Once a smart contract is deployed on a blockchain, it is stored on every node in the network. When it runs, every node executes the code independently to ensure they all reach the same result. If a node tried to cheat and change the outcome, the rest of the network would reject its transaction.

Once the contract code is written and deployed onto the blockchain, no one can alter, modify, or delete it. The contract code and execution results are replicated and validated across every computer node in the blockchain network.

Because the code is baked into the blockchain’s history, it cannot be edited. If there is a bug in the code, the developer usually has to deploy a completely new version of the contract.

A major technical limitation is that smart contracts cannot natively pull data from the outside world because it would break the consensus of the blockchain. Oracles serve as secure bridges that transfer real-world data to and from smart contracts. For example, a smart contract might fetch real-time asset prices so that lending protocols know when to liquidate undercollateralized loans.

Real-World Benefits and Inherent Limitations

A primary benefit of smart contracts is trust and security. Parties do not need to know or trust each other, nor do they rely on external enforcement mechanisms. The underlying code is visible on the public blockchain, allowing anyone to verify and audit the parameters.

Because they are automated, smart contracts eliminate the time-consuming paperwork and manual verification involved in traditional contracts. Automation reduces the potential for human error that often occurs when manually processing forms. By removing middle agents such as brokers and escrow services, transaction fees are significantly reduced.

However, automated code cannot adapt to the fluid, unpredictable nature of real-world business relationships. Real-world contracts are frequently modified, extended, or renegotiated mid-term based on changing market conditions. Modifying a deployed smart contract requires deploying completely new code and manually migrating all user data. Any errors present during deployment are locked into the blockchain permanently.

A smart contract also executes blindly without context. If it receives incorrect data, it will automatically trigger payments or penalties based on that faulty data.

What Are the Risks of Smart Contracts?

While smart contracts offer automation and eliminate intermediaries, their “code is law” nature introduces unique technical, legal, and operational vulnerabilities. Software bugs or logic flaws in the code can be exploited by malicious actors to instantly drain locked crypto assets from decentralized applications.

Transactions on a public blockchain are irreversible. If funds are sent to the wrong contract address or are locked up due to a coding mistake, they cannot be retrieved by a central customer support team.

Borderless, autonomous software frequently clashes with centuries-old legal systems designed for physical jurisdictions. Nodes validating a smart contract are scattered across dozens of countries simultaneously. If a commercial dispute arises, determining which country’s or state’s courts hold jurisdiction is immensely complex.

Traditional bank transfers feature fraud protection, chargebacks, and identity verification. Smart contracts operate pseudonymously; if a consumer is defrauded or signs a malicious contract script, there is rarely a legal avenue to recover the lost property.

Global financial regulators closely scrutinize smart contract protocols, automated market makers, and decentralized lending platforms. Sudden shifts in anti-money laundering or securities regulations can instantly render an active smart contract deployment illegal.

How Should Lawyers Prepare for the Growth of Smart Contracts?

Smart contracts will not replace lawyers, but they could fundamentally change how legal professionals draft agreements, enforce compliance, and resolve disputes. As business logic migrates to code, legal teams must evolve into technical hybrid advisors.

Lawyers need to understand basic programming logic. They will draft the parameters, recitals, and dispute frameworks in natural language, while collaborating with developers to translate the clauses into smart contract code. They must be able to audit a smart contract’s natural language specification against its deployed code to ensure the machine instructions reflect the client’s intent.

Traditional litigation is too slow and costly for on-chain microtransactions. Lawyers could consider drafting operational clauses that allow parties to pause or terminate an active smart contract if a breach of contract occurs in the physical world. They could also develop legal mechanisms for rollback agreements, in which parties contractually agree to return digital assets via a secondary transaction if there’s a dispute or code exploit.

Because smart contracts operate globally across borderless blockchains, lawyers should establish enforceable governing law and forum selection clauses. These clauses can be embedded within the smart contract metadata or in accompanying natural-language agreements.

Prepare for the Future of Law and Technology

Technology is constantly reshaping the landscape of the legal profession. Aspiring attorneys need to understand these changes so they can guide their clients. For those interested in becoming a practicing attorney, Purdue Global Law School’s online Juris Doctor (JD) program offers electives in artificial intelligence law, cybersecurity law, and other high-tech areas. Graduates of the JD program are academically eligible upon graduation to sit for the California or Connecticut bar or, with an approved petition, the Indiana bar.

Business leaders and professionals who wish to understand the intersection of law and technology can benefit from Purdue Global Law School’s online Executive Juris Doctor (EJD) program. Students can also explore individual law courses.

Request more information today to find the path that works for you.

About the Author

Purdue Global Law School

Established in 1998, Purdue Global Law School (formerly Concord Law School) is Purdue University's fully online law school for working adults.

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