Smart contract

What it means

A smart contract is a piece of code stored on a blockchain that runs by itself once a predefined condition is met. Typically it releases a payment, transfers a token or records an event without an intermediary or a bank having to check and approve the step.

The name is somewhat misleading, because a smart contract is not automatically a contract under the Slovak Civil Code or Commercial Code. It is rather a technical mechanism for performing an arrangement, which can carry out an existing agreement but does not replace its content, interpretation or dispute resolution.

Smart contracts are used mostly in crypto-assets, decentralised finance, asset tokenisation and payments in stablecoins. An ordinary business meets them less often, for example in automated holding of funds until delivery or in tracking shipments across a logistics chain.

How it works in practice

For business use it is sensible to sign a conventional written agreement as well, describing what the code does, who is liable for a bug, how disputed situations are handled and which law applies. The code itself does not answer these questions, and a court will look at the parties' intent, not just lines of code.

A smart contract can play a role similar to escrow, releasing money only once delivery is confirmed. The condition, however, is often checked by an external data source called an oracle, and its reliability matters as much as the code. Wrong input leads to wrong but irreversible performance.

For accounting and tax, operations run through a smart contract are judged by their economic substance. If a company receives or pays out crypto-assets, it has to deal with their valuation, exchange differences and the taxation of crypto-assets, while network transaction fees are usually a cost related to the operation.

What to watch out for

A bug is hard to fix once the code is deployed, and a transaction on a public blockchain usually cannot be reversed. Before using it with larger amounts, it is worth having the code independently reviewed and agreeing a contractual procedure for cases where something executes differently from what the parties intended.

Regulation is developing, mainly under the MiCA regulation and anti-money laundering rules. If a smart contract is used to issue tokens or to provide crypto-asset services, the business may fall under licensing and disclosure duties that are best checked in advance.