Smart contracts, also known as a smart property, are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that make a contractual clause unnecessary. Smart contracts often emulate the logic of contractual clauses. Proponents of smart contracts claim that many kinds of contractual clauses may thus be made partially or fully self-executing, self-enforcing, or both. Smart contracts aim to provide security superior to traditional contract law and to reduce other transaction costs associated with contracting.
Contents
Computing platforms and software that can be organised for rational decision-making methods which achieve meaningful execution are known as agoric systems. These type of contracts have been traditionally drafted by lawyers.
The real-world implementation of a smart contract that gained mainstream coverage was The DAO, a distributed autonomous organization for venture capital funding, which was launched with US$150 million in crowdfunding in May 2016 and was hacked and drained of approximately US$50 million in cryptocurrency three weeks later.
History
The phrase "smart contracts" was coined by computer scientist Nick Szabo in 1994, to emphasize the goal of bringing what he calls the "highly evolved" practices of contract law and related business practices to the design of electronic commerce protocols between strangers on the Internet. Szabo's 1994 description was:
A smart contract is a computerized transaction protocol that executes the terms of a contract. The general objectives are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitrations and enforcement costs, and other transaction costs.
Szabo, inspired by researchers like David Chaum, also had a broader expectation that specification through clear logic, and verification or enforcement through cryptographic protocols and other digital security mechanisms, might constitute a sharp improvement over traditional contract law, even for some traditional kinds of contractual clauses (such as automobile security interests that provide for repossession) that could be brought under the dominion of computer protocols.
Security issues
A second generation of projects, such as Ethereum, emerged after the first successful blockchain deployment. These were designed to achieve greater turing completeness and create vast value chain ecologies.
A smart contract is "a computerized transaction protocol that executes the terms of a contract." A blockchain-based smart contract is visible to all users of said blockchain. However, this leads to a situation where bugs, including security holes, are visible to all but may not be able to be quickly fixed. Such an attack, difficult to fix quickly, was successfully executed on The DAO in June 2016, draining US$50 million in Ether while developers attempted to come to a solution that would gain consensus. The program on the blockchain had time requirements in place before the hacker could access the funds, and remove funds from The DAO contract. A hard fork of the blockchain was done to claw back the funds from the attacker before the time limit expired.
Replicated titles and contract execution
Szabo proposes that smart contract infrastructure can be implemented by replicated asset registries and contract execution using cryptographic hash chains and Byzantine fault tolerant replication.
One proposal for using bitcoin for replicated asset registration and contract execution is called "colored coins". A replicated domain name registry is implemented in Namecoin; replicated titles for potentially arbitrary forms of property, along with replicated contract execution, are implemented in Crypti, Ripple, Mastercoin and Ethereum. NXT implements replicated property titles based on proof-of-stake in the underlying currency.
Applications may include financial instruments such as bonds, shares, and derivatives, assurance contracts, and other instruments and transactions where the nodes can monitor the events on which the smart contract rules are conditioned. Advantages of a smart contract over its equivalent conventional financial instrument hypothetically include minimizing counterparty risk, reducing settlement times, and increased transparency. As of 2015, UBS was experimenting with "smart bonds" that use the bitcoin blockchain in which payment streams could hypothetically be fully automated, creating a self-paying instrument.
On February 1, 2017, Expanse launched the Expanse Bond System (EBS). This was the first of its kind system using smart contracts.
In popular culture
Permanence (2002) by Karl Schroeder features a "rights economy" in which all physical objects are nano-tagged with contractual requirements so that payment may be enforced for all uses of proprietary information, e.g. a military mission in deep space must continuously justify the cost-benefit ratio of their mission to the ship or it will stop working.