To review, “smart contracts” are a feature of some blockchain-based
systems, which allow an interaction between multiple parties to be
encoded as a set of rules which will be executed automatically by
the system, so that neither the parties nor anyone else can prevent
those rules from being enforced.
To give just one example, a legal contract need not try to
anticipate absolutely every relevant event that might occur. If
some weird thing happens that is not envisioned in a regular legal
contract, the parties can work out a modification to the contract
that seems reasonable to them, and failing that, a judge might
decide the outcome, subject to established legal principles.
Similarly, a single error or “bug” in writing a regular contract,
causing its literal meaning to differ from what the parties
intended, is unlikely to lead to extreme results because the legal
system will often resolve such a problem by trying to be reasonable.
Contrast this with “smart contracts” where a bug in a “contract’s”
code can lead to a perverse result that may allow one party to
exploit the bug, extracting much of the value out of the
arrangement with no recourse for the other parties. That’s what
happened with the DAO in Ethereum, leading to a controversial
attempt to unwind a legal-according-to-the-rules set of
transactions, and dividing the Ethereum community.