Smart Contract Legal Enforceability: When Code Isn't Law

By Chanté Eliaszadeh | October 15, 2025

"Code is law." This founding ethos of the blockchain movement promised to replace messy human legal systems with immutable, self-executing smart contracts. No lawyers, no judges, no ambiguity—just deterministic code enforcing agreements with mathematical certainty.

Then came The DAO hack. In June 2016, an attacker exploited a vulnerability in The DAO's smart contract code and drained $50 million in Ether. The attacker's controversial defense? They had followed the code's rules exactly as written. If "code is law," the exploit was perfectly legal.¹

The Ethereum community's response—a controversial hard fork to reverse the theft—acknowledged an uncomfortable truth: when the stakes are high enough, human legal and social systems override code. The "code is law" fantasy died that day.

Nearly a decade later, smart contracts power a $150 billion DeFi ecosystem, facilitate billions in tokenized assets, and automate complex financial transactions. Yet fundamental questions about their legal enforceability remain unanswered. When does a smart contract constitute a legally binding agreement? Can code bugs be treated as mutual mistake? Who bears liability when oracles provide bad data?

This article examines smart contract enforceability through the lens of traditional contract law, explores emerging legal frameworks, and provides practical guidance for developers and businesses deploying smart contracts in legally defensible ways.

Traditional Contract Formation Meets Blockchain

Contract law developed over centuries to address human agreements. Smart contracts—deterministic code executing automatically on blockchains—challenge every assumption underlying this framework.

The Four Essential Elements

Under common law, enforceable contracts require four elements:²

1. Offer: One party proposes specific terms
2. Acceptance: The other party agrees to those terms
3. Consideration: Both parties exchange something of value
4. Mutual assent: Both parties understand and intend to be bound

Applying this framework to smart contracts raises immediate questions:

Offer and Acceptance: When Alice interacts with a DeFi protocol smart contract, has she "accepted" an offer? Courts traditionally require meeting of the minds—subjective intent to be bound. Smart contracts execute based on function calls, not subjective intent.

The Ninth Circuit's Patrick v. Running Warehouse decision provides guidance: digital agreements are enforceable when users receive clear, conspicuous disclosure of terms and provide unambiguous assent.³ For smart contracts, this means:

• Terms must be human-readable and disclosed before interaction
• User interface must clearly communicate the legal nature of the transaction
• Users must take affirmative action demonstrating assent (beyond merely calling a function)

Consideration: Most smart contract interactions satisfy this requirement easily. Trading tokens for tokens, paying gas fees for service execution, or depositing collateral for loans all constitute valid consideration.

Mutual Assent: Here's where smart contracts struggle most. Traditional contracts assume parties negotiate, understand, and agree to terms. Smart contracts are typically:

• Immutable once deployed
• Written in code few users can read
• Offering no negotiation opportunity
• Executed automatically without human intermediaries

Courts may find mutual assent lacking when users interact with smart contracts they cannot understand, particularly if the code's behavior differs from reasonable expectations based on user interface descriptions.

Smart Contracts Under the UCC

The Uniform Commercial Code governs sales of goods and commercial transactions across U.S. jurisdictions. Recent amendments create frameworks specifically for digital assets and smart contracts.

UCC Article 12: Controllable Electronic Records

In 2022, the Uniform Law Commission adopted Article 12, introducing "controllable electronic records" (CERs)—records stored electronically that can be subjected to "control."⁴ Smart contracts can facilitate this control by automatically transferring cryptocurrency or tokens between parties based on predefined conditions.

Key implications:

• Smart contracts using control mechanisms may qualify for secured transaction treatment under Article 9
• Control can substitute for physical possession in secured lending
• Automated transfer via smart contract satisfies "delivery" requirements

However, Article 12 governs property rights in digital assets—not the enforceability of the underlying agreements. A smart contract may successfully transfer a CER while the underlying transaction remains unenforceable for other reasons (fraud, mistake, unconscionability).

State Smart Contract Legislation

Multiple states have enacted laws explicitly recognizing smart contracts:

• Illinois Blockchain Technology Act: Makes smart contracts and blockchain records admissible as evidence and prohibits courts from denying legal effect solely because they use blockchain technology⁵
• Arizona, Nevada, Ohio, Tennessee, Wyoming: Similar laws recognizing smart contracts as valid electronic records

These statutes don't create special treatment for smart contracts—they simply confirm that blockchain-based agreements aren't automatically invalid. Smart contracts must still satisfy traditional contract formation requirements.

The DAO Hack: Lessons in Legal Versus Code Execution

The DAO incident remains the defining case study for smart contract legal limits.

What Happened

The DAO was a decentralized autonomous organization launched in April 2016 via a token sale, raising approximately $150 million worth of Ether. The organization's governance and fund disbursement ran entirely through smart contracts. The code explicitly stated it was the controlling authority—any written descriptions were merely "for educational purposes."⁶

On June 17, 2016, an attacker exploited a reentrancy vulnerability in The DAO's smart contract, recursively calling the withdrawal function before balance updates occurred. Over several hours, the attacker drained approximately $50 million in Ether.⁷

The Attacker's Legal Theory

The attacker published an open letter claiming the funds were obtained legally according to the smart contract's terms. Since The DAO had proclaimed "code is law," the attacker argued they had performed a legal transaction—the code permitted the action, therefore it was allowed.⁸

This raised profound questions: If parties agree that code governs their relationship, can exploitation of coding errors constitute legal performance rather than breach or theft?

Why "Code is Law" Failed

The DAO hack exposed fundamental incompatibilities between "code is law" philosophies and legal reality:

1. Contracts Already Have "Escape Hatches"

Traditional contract law includes extensive remedies for errors and unforeseen circumstances:

• Mutual mistake: When both parties share a mistaken belief about a basic assumption, courts may void the contract
• Unilateral mistake: If one party makes an error and the other party knows it, the contract may be voidable
• Impossibility: Performance becomes impossible through no fault of either party
• Unconscionability: Terms are so one-sided they shock the conscience

These doctrines recognize that rigid enforcement of literal terms sometimes produces unjust results. Smart contracts claiming to eliminate these protections likely can't—courts will apply equitable remedies regardless.⁹

2. Bugs as Mutual Mistake

The DAO's reentrancy vulnerability constituted a coding error. No party intended the contract to permit recursive withdrawals draining the fund. Under mutual mistake doctrine, when both parties share a mistaken belief about a fundamental fact (here: how the code actually functions), courts may rescind the contract.

3. Criminal Law Overrides Contract Terms

Even if The DAO's terms stated "code is law," criminal prohibitions against theft apply regardless of contract language. You cannot contract to permit illegal activity. If the attacker's conduct constituted unauthorized access to a computer system or theft, "the code permitted it" is not a defense.¹⁰

Legal Precedent Status

Notably, The DAO hack never produced formal legal precedent because:

• The Ethereum community hard-forked to reverse the theft
• The attacker returned most funds and disappeared
• No criminal charges were filed
• No civil litigation proceeded to judgment

However, the incident profoundly influenced how courts and regulators view smart contracts. The SEC later determined DAO tokens were securities, establishing that smart contract-based offerings aren't exempt from securities laws.¹¹

The Oracle Problem: Off-Chain Dependencies

Smart contracts can only execute based on information available on-chain. But most real-world agreements depend on external facts: stock prices, weather conditions, election results, delivery confirmation, insurance claims.

Oracles serve as bridges, feeding external data to smart contracts. This creates a trust problem fundamentally at odds with blockchain's trustless design.

Legal Liability for Oracle Failures

When an oracle provides incorrect data, who bears liability?

Consider a simple example: A smart contract-based insurance policy pays out if a hurricane hits Miami. The contract relies on Oracle A for weather data. Oracle A incorrectly reports no hurricane (when one occurred), and the policy doesn't pay. The insured suffers losses.

Potential liability theories:

1. Oracle Provider Liability

Recent legal analysis proposes default rules where oracles bear primary responsibility for transaction errors arising from inaccurate data sourcing or validation failures.¹² This makes economic sense—oracles are best positioned to ensure data accuracy and maintain reliable feeds.

However, determining "oracle malfunction" versus "correct reporting of incorrect source data" creates thorny causation questions. If Oracle A correctly reports data from Weather Service B, but Weather Service B's data was wrong, who's liable?

2. Smart Contract Developer Liability

If oracles demonstrate they functioned correctly, liability may shift to smart contract developers who failed to:

• Select reliable oracles
• Implement redundancy (multiple oracle sources)
• Build in error checking or sanity limits
• Clearly disclose oracle dependencies to users

3. Contractual Risk Allocation

Sophisticated parties should address oracle failure in their agreements:

• Define what constitutes oracle failure
• Specify backup procedures or alternative data sources
• Allocate risk explicitly (who bears loss if oracle fails?)
• Establish dispute resolution mechanisms

The lack of established case law creates enormous uncertainty. Smart contract developers relying on oracles for material terms should consult legal counsel on appropriate disclaimers, limitations of liability, and risk allocation structures.

Code Bugs: Mutual Mistake or Caveat Emptor?

The Parity multi-sig wallet incidents illustrate how code bugs create legal ambiguity.

Parity Wallet Freeze Incident

On November 8, 2017, a user accidentally triggered a vulnerability in Parity's multi-sig wallet library contract, causing over $150 million in Ether to become permanently frozen.¹³ Unlike The DAO hack (intentional exploitation), this was an unintended consequence of a user's legitimate action interacting with a code oversight.

The library contract had never been initialized, allowing any user to call the initialization function and subsequently self-destruct the library—bricking all dependent wallets.

Legal Analysis: Bug as Mutual Mistake?

Under mutual mistake doctrine, contracts may be voidable when both parties share a mistaken belief about a basic assumption on which the contract was made, and the mistake materially affects the agreed exchange.¹⁴

Applying this to the Parity incident:

• Shared mistaken belief: Both developers and users believed the wallet would function as intended (securely holding funds)
• Basic assumption: The smart contract code correctly implemented wallet functionality
• Material effect: The bug rendered millions in funds permanently inaccessible

However, software typically comes with warranty disclaimers. Parity's terms of use included extensive limitations of liability under the GPL open-source license. Whether such disclaimers effectively waive mutual mistake defenses in the smart contract context remains untested in court.

Key distinction: Parity (unlike The DAO) involved a bug causing loss to users, not an attacker enrichment. Courts may view passive loss differently than active exploitation when applying equitable doctrines.

Lessons for Developers

The Parity incidents raised questions regarding liability for software oversights:¹⁵

• Can open-source license disclaimers shield developers from negligence claims?
• Does deploying immutable financial software create higher duty of care?
• Should users expect "buyer beware" or reasonable security assurance?

Risk mitigation strategies include:

• Multiple independent security audits before deployment
• Bug bounty programs incentivizing vulnerability discovery
• Phased rollouts limiting initial value at risk
• Upgrade mechanisms or pause functions (trading immutability for security)
• Explicit user warnings about novel technology risks

Dispute Resolution: Arbitration and Jurisdiction

Traditional contracts specify governing law and dispute resolution mechanisms. Smart contracts executing on blockchains without clear jurisdictional nexus create unique challenges.

Jurisdictional Uncertainty

Smart contracts operate via distributed nodes potentially located worldwide. This raises questions:

• Which jurisdiction's law applies?
• Where can litigation be brought?
• Can courts compel performance or rescission of on-chain transactions?

The Van Loon v. Department of the Treasury case illustrated these challenges. The Fifth Circuit held that Tornado Cash's immutable smart contracts were not "property" capable of being owned by any identifiable party.¹⁶ If smart contracts cannot be tied to a legal actor, enforcement—both private and regulatory—becomes extremely difficult.

Arbitration as Preferred Solution

Arbitration offers several advantages for smart contract disputes:¹⁷

Certainty: Parties specify:

• Governing law (Arizona, Tennessee, Delaware considered crypto-friendly)
• Seat of arbitration
• Arbitrator qualifications (need blockchain expertise)

Enforceability: Arbitration awards are widely enforceable under the New York Convention across 160+ countries.

Confidentiality: Private dispute resolution limits disclosure of proprietary smart contract details.

Expertise: Parties can select arbitrators with technical blockchain knowledge rather than generalist judges.

Best Practices for Arbitration Clauses

Effective smart contract arbitration provisions should specify:¹⁸

• Governing law jurisdiction: Same as arbitration seat to avoid conflicts
• Arbitration seat: Choose crypto-friendly jurisdiction (Wyoming, Swiss cantons, Singapore)
• Arbitrator qualifications: Require blockchain/smart contract expertise
• Discovery limits: Control costs by limiting document production
• Injunctive relief procedures: Address urgent matters (oracle failures, security breaches)

The JAMS organization has published specialized Smart Contract Rules governing blockchain disputes, recognizing the unique technical considerations.¹⁹

Wyoming DUNA: Smart Contract Legal Recognition

Wyoming's Decentralized Unincorporated Nonprofit Association (DUNA) Act represents the most comprehensive smart contract legal framework in the United States.

Key Features

Enacted in March 2024 (effective July 1, 2024), the DUNA Act allows DAOs to organize as legal entities with:²⁰

• Legal entity status: Can own property, enter contracts, sue and be sued
• Limited liability: Members enjoy corporate-style liability protection
• Smart contract governance: Governing principles can be embedded directly in on-chain smart contracts
• Operational flexibility: Token votes and smart contract proposals legally bind the organization

For our purposes, the critical innovation is formal legal recognition of smart contract governance. DUNA governing documents can reference on-chain smart contract code as authoritative, and courts will recognize governance decisions made via token voting and smart contract execution.

Implications for Smart Contract Enforceability

The DUNA framework demonstrates that "code as governance" is legally feasible when properly structured:

• Smart contracts operate within a legal entity wrapper providing liability protection
• Human-readable governing documents complement code (not replaced by code)
• Members retain traditional legal rights (courts can still intervene for fraud, illegal activity)
• Formalities matter: Registration, annual compliance, and proper documentation required

This hybrid approach—legal entities using smart contracts for governance while maintaining legal personality—may become the model for enforceable smart contract systems.

For detailed guidance on DAO legal structures, see our article on DAO Liability After Lido: Why You Need a Legal Wrapper.

Ricardian Contracts: Bridging Law and Code

The most promising approach to smart contract legal enforceability may be Ricardian contracts—hybrid instruments readable by both humans and machines.

What Are Ricardian Contracts?

Invented by Ian Grigg in 1996, Ricardian contracts are legal agreements that:²¹

1. Human-readable: Written in natural language (English, etc.)
2. Machine-readable: Structured data format enabling automated processing
3. Cryptographically secured: Digitally signed and hashed to prevent tampering
4. Legally binding: Constitutes a contract enforceable in court

The fundamental advantage: If disputes arise, parties can litigate based on the human-readable prose while the machine-readable portion enables automated execution for undisputed performance.

How They Work

A Ricardian contract typically includes:

Legal prose layer:

Agreement between [Party A] and [Party B] whereby Party A agrees to
deliver [quantity] of [asset] to Party B upon payment of [price],
with delivery occurring no later than [date]. Dispute resolution via
arbitration under [rules] in [jurisdiction].

Machine-readable layer:

{
  "parties": ["0x123...", "0xabc..."],
  "asset": "TOKEN_ABC",
  "quantity": 1000,
  "price": { "amount": 50000, "currency": "USDC" },
  "deliveryDeadline": "2025-12-31T23:59:59Z",
  "arbitration": { "rules": "AAA", "seat": "Wyoming" }
}

Smart contract execution layer:

function executeDelivery() external {
    require(block.timestamp <= deliveryDeadline, "Past deadline");
    require(payment.received, "Payment not confirmed");
    token.transfer(buyer, quantity);
}

Legal Enforceability Advantages

Ricardian contracts solve several enforceability problems:²²

1. Disclosure and Assent: The human-readable prose satisfies disclosure requirements. Users can meaningfully understand terms before accepting.

2. Mutual Assent: By signing the human-readable portion, parties demonstrate subjective intent to be bound—not merely calling a function.

3. Interpretation: When code behavior diverges from reasonable expectations, courts can interpret the natural language prose rather than attempting to discern "code intent."

4. Gap-Filling: The legal prose can address contingencies impractical to code (force majeure, material adverse change, good faith obligations).

5. Dispute Resolution: Courts receive familiar legal documents rather than raw smart contract bytecode.

Implementation Challenges

Despite their promise, Ricardian contracts face adoption hurdles:

• Requires both legal drafting and technical implementation (higher upfront costs)
• Human-readable and machine-readable portions must remain synchronized
• Limited tooling and standardization
• DeFi protocols resist introducing human-readable terms (perceived centralization)

However, for high-value commercial transactions, tokenized securities, and institutional DeFi, Ricardian contracts offer the most legally defensible approach.

For more on institutional-grade legal structures, see our guides on DeFi Protocol Legal Structure and Treasury Management for Crypto Companies.

Best Practices for Legally Enforceable Smart Contracts

Drawing from the analysis above, here are practical recommendations for developers and businesses:

1. Don't Rely on "Code Is Law"

Accept that courts will apply traditional legal doctrines regardless of what your smart contract or terms of use claim. Design with this reality in mind.

2. Provide Clear Disclosures

Before users interact with smart contracts:

• Explain functionality in plain language
• Disclose risks, including bugs and vulnerabilities
• Identify external dependencies (oracles, admin keys)
• Specify governing law and dispute resolution
• Require affirmative assent beyond mere function call

3. Use Ricardian Contracts for High-Value Transactions

When stakes are significant:

• Draft traditional contract prose alongside code
• Ensure both versions cover the same terms
• Use digital signatures for both components
• Specify that legal prose governs in case of conflict

4. Address Oracle Failures Explicitly

If your smart contract depends on external data:

• Identify oracle providers and data sources
• Specify backup procedures if oracle fails
• Allocate risk explicitly (who bears loss?)
• Consider multi-oracle redundancy
• Implement sanity checks and circuit breakers

5. Include Robust Arbitration Clauses

Rather than hoping code never fails:

• Specify arbitration for all disputes
• Choose crypto-friendly governing law
• Require arbitrators with blockchain expertise
• Define procedures for emergency injunctive relief
• Make arbitration awards executable on-chain

6. Security Audits Are Not Optional

Multiple independent security audits before deployment should be non-negotiable for any smart contract handling significant value. Audits don't eliminate bugs, but they significantly reduce liability risk by demonstrating reasonable care.

7. Consider Mutability Mechanisms

Pure immutability creates legal problems when bugs emerge:

• Upgradeable proxies allow bug fixes
• Pause functions prevent ongoing harm
• Admin multi-sigs enable emergency response
• Time-locks give users exit opportunities

Balance immutability benefits against legal and security risks. For guidance on governance structures enabling safe upgrades, see DAO LLC Formation Guide.

8. Form a Legal Entity

Operating smart contracts through a legal entity (Wyoming DAO LLC, Delaware corporation, Swiss foundation) provides:

• Limited liability for developers and users
• Clear jurisdictional nexus for dispute resolution
• Ability to own assets and enter off-chain contracts
• Regulatory compliance framework

For detailed entity comparison, see our article on DeFi Protocol Legal Structure: LLC, Foundation, or DAO?.

The Path Forward: Convergence, Not Replacement

The original "code is law" vision—replacing human legal systems with deterministic smart contracts—has proven unworkable. Code cannot account for every contingency, bugs are inevitable, and courts will not abdicate their authority to algorithm.

But the converse—dismissing smart contracts as legally meaningless—is equally wrong. Smart contracts offer genuine efficiencies: automated execution, reduced counterparty risk, transparent terms, and global accessibility.

The future lies in convergence: legal frameworks that recognize smart contracts as valid instruments while preserving essential protections, and smart contract designs that complement rather than replace traditional legal mechanisms.

Ricardian contracts, Wyoming's DUNA framework, and specialized arbitration rules for blockchain disputes represent early steps toward this synthesis. As courts develop more precedent and legislators enact thoughtful frameworks, smart contract legal enforceability will become clearer.

Until then, developers and businesses deploying smart contracts should proceed with sophisticated legal guidance. The technology is ready. The law is catching up. Success requires navigating both simultaneously.

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Need Smart Contract Legal Guidance?

Astraea Counsel helps DeFi protocols, DAOs, and blockchain projects structure legally enforceable smart contract systems, implement Ricardian contract frameworks, and navigate regulatory compliance. Explore our Digital Assets & Blockchain services.

Related Resources

• DAO Liability After Lido: Legal Wrapper Requirements - Entity structures for DAO smart contract governance
• DeFi Protocol Legal Structure: LLC, Foundation, or DAO? - Comprehensive entity comparison
• Token Launch Legal Checklist: SEC Compliance - Securities law for tokenized assets
• Treasury Management for Crypto Companies - Custody and operational legal frameworks
• Contact Us - Discuss your smart contract legal strategy

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Disclaimer: This article provides general information for educational purposes only and does not constitute legal advice. Smart contract legal enforceability is highly fact-specific. Consult qualified legal counsel for advice on your specific smart contract deployment.

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Footnotes

1. Latorre Attorney, "The DAO Hack of 2016: Ethereum's $50 Million Nightmare," Medium (2024), available at https://latorreattorney.medium.com/the-dao-hack-of-2016-ethereums-50-million-nightmare-and-its-lasting-impact-on-defi-law-and-ef0c494440d4 ↩

2. Restatement (Second) of Contracts § 17 (1981). ↩

3. Patrick v. Running Warehouse, 93 F.4th 468 (9th Cir. 2022). ↩

4. Uniform Law Commission, UCC Article 12: Controllable Electronic Records (2022), available at https://www.uniformlaws.org/committees/community-home?CommunityKey=e104aaa6-db85-4976-b70e-5c6c84977b5a ↩

5. Illinois Blockchain Technology Act, 205 ILCS 730/1 et seq. (2020). ↩

6. David Gerard, "The DAO: the steadfast iron will of unstoppable code," Attack of the 50 Foot Blockchain (2016), available at https://davidgerard.co.uk/blockchain/the-dao/ ↩

7. Gemini Cryptopedia, "The DAO: What Was the DAO Hack?" available at https://www.gemini.com/cryptopedia/the-dao-hack-makerdao ↩

8. Medium, "'Code is Law' is no Defense for Blackhat Hacking," Immunefi (2024), available at https://medium.com/immunefi/code-is-law-is-no-defense-for-blackhat-hacking-b083340446f4 ↩

9. Hacking Distributed, "Smart-Contract Escape Hatches: The Dao of The DAO" (June 22, 2016), available at https://hackingdistributed.com/2016/06/22/smart-contract-escape-hatches/ ↩

10. Id. ↩

11. SEC, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Release No. 81207 (July 25, 2017). ↩

12. Columbia Business Law Review, "Smart Contract Accountability Problems: Default Oracle Liability as the Solution," available at https://journals.library.columbia.edu/index.php/CBLR/article/view/14257 ↩

13. Proskauer Rose LLP, "When Smart Contracts are Outsmarted: The Parity Wallet 'Freeze' and Software Liability in the Internet of Value," available at https://www.proskauer.com/blog/when-smart-contracts-are-outsmarted-the-parity-wallet-freeze-and-software-liability-in-the-internet-of-value ↩

14. Restatement (Second) of Contracts § 152 (1981). ↩

15. Proskauer Rose LLP, supra note 13. ↩

16. Van Loon v. Department of the Treasury, 122 F.4th 549 (5th Cir. 2024). ↩

17. Norton Rose Fulbright, "Arbitrating Smart Contract disputes," available at https://www.nortonrosefulbright.com/en/knowledge/publications/ea958758/arbitrating-smart-contract-disputes ↩

18. Kluwer Arbitration Blog, "Arbitration of Smart Contracts Part 3 - Issues to Consider When Choosing Arbitration to Resolve Smart Contracts Disputes" (Aug. 30, 2018), available at https://arbitrationblog.kluwerarbitration.com/2018/08/30/arbitration-smart-contracts-part-3/ ↩

19. JAMS, Rules Governing Disputes Arising out of Smart Contracts, available at https://www.jamsadr.com/rules-smart-contracts ↩

20. Wyo. Stat. Ann. § 17-31-101 et seq. (Decentralized Unincorporated Nonprofit Association Act, effective July 1, 2024); FinTech and Digital Assets Blog, "Wyoming Adopts New Legal Structure for DAOs" (Apr. 2024), available at https://www.fintechanddigitalassets.com/2024/04/wyoming-adopts-new-legal-structure-for-daos/ ↩

21. Ian Grigg, "The Ricardian Contract" (2004), available at https://iang.org/papers/ricardian_contract.html ↩

22. LTO Network, "Ricardian contracts — legally binding agreements on the blockchain," Medium (2024), available at https://medium.com/ltonetwork/ricardian-contracts-legally-binding-agreements-on-the-blockchain-4c103f120707 ↩