When to Use Smart Contracts Instead of Traditional Contracts – A Conceptual Analysis

Smart contracts are code-based representations of business logic that encapsulate predefined rules that they verify and execute autonomously. As self-executing agreements, these contracts running on a blockchain facilitate interactions between untrusted parties, eliminating the need for intermediaries. They speed processes, increase transparency, and facilitate data exchange across national and organizational boundaries, providing a competitive advantage. However, there are significant costs associated with implementing smart contracts. In our study, we conduct a comparative analysis of these costs and compared them to traditional contracts. Using a combination of literature review and expert interviews, we dissect the cost structures of both approaches at an abstract level. We then construct a matrix to systematically compare traditional contracts with smart contracts. This framework allows us to model the conditions that favor the use of smart contracts over traditional ones, and to identify instances where each approach has a distinct advantage.