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Smart contract

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Smart contracts 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. They aim with smart contracts to provide security superior to traditional contract law and to reduce other transaction costs associated with contracting.

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.[1]

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 proposal was:[2]

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.[3]

Within the recent hype around blockchain,[4] "smart contract" is mostly used more specifically in the sense of general purpose computation that takes place on a blockchain or distributed ledger. In this interpretation, used for example by the Ethereum Foundation[5] or IBM[6], a smart contract is not necessarily related to the classical concept of a contract, but can be any kind of computer program.

Implementations

Ethereum and Monax, emerged after the first successful blockchain deployment. These were designed to achieve greater Turing completeness and create vast value chain ecologies.[7]

Notable examples of implementation of smart contract technology are:

Security issues

A smart contract is "a computerized transaction protocol that executes the terms of a contract."[2] 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.[11] 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.[1] The DAO program had a time delay in place before the hacker could remove the funds; a hard fork of the Ethereum software was done to claw back the funds from the attacker before the time limit expired.[12]

Replicated titles and contract execution

Szabo proposes that smart contract infrastructure can be implemented by replicated asset registries[13] and contract execution using cryptographic hash chains and Byzantine fault tolerant replication. Askemos implemented this approach in 2002[14][15] using Scheme (later adding SQLite[16][17]) as contract script language.[18]

One proposal for using bitcoin for replicated asset registration and contract execution is called "colored coins".[19] Replicated titles for potentially arbitrary forms of property, along with replicated contract execution, are implemented in different projects.

Hypothesised advantages of a smart contract over its equivalent conventional financial instrument include minimizing counterparty risk, reducing settlement times, and increased transparency.[20] As of 2015, UBS was experimenting with "smart bonds" that use the bitcoin blockchain[21] in which payment streams could hypothetically be fully automated, creating a self-paying instrument.[22]

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.

See also

References

  1. ^ a b Price, Rob (17 June 2016). "Digital currency Ethereum is cratering amid claims of a $50 million hack". Business Insider. Retrieved 17 June 2016.
  2. ^ a b Tapscott, Don; Tapscott, Alex (May 2016). The Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World. pp. 72, 83, 101, 127. ISBN 978-0670069972.
  3. ^ Nick Szabo. "Formalizing and Securing Relationships on Public Networks". Firstmonday.org. First Monday. Retrieved 2016-12-15.
  4. ^ Stafford, Philip; Murphy, Hannah. "Has the blockchain hype finally peaked?". ft.com. Financial Times. Retrieved 1 June 2017.
  5. ^ Buterin, Vitalik. "Ethereum Whitepaper". github. Retrieved 1 June 2017.
  6. ^ Cachin, Christian. "Architecture of the Hyperledger Blockchain Fabric" (PDF). ibm.com.
  7. ^ Alferes, Jose Julio; Leopoldo Bertossi; Guido Governatori; Paul Fodor; Dumitru Roman (2016). Rule Technologies. Research, Tools, and Applications: 10th International Symposium, RuleML 2016, Stony Brook, NY, USA, July 6-9, 2016. Proceedings. Springer. p. 8191. ISBN 9783319420196. Retrieved 19 January 2017.
  8. ^ "Black Halo whitepaper: Two Party double deposit trustless escrow in cryptographic networks and Bitcoin" (PDF).
  9. ^ "Ethereum: A Next-Generation Generalized Smart Contract and Decentralized Application Platform". Ethereum.org. Retrieved 12 January 2014.
  10. ^ "An empirical study of Namecoin and lessons for decentralized namespace design" (PDF).
  11. ^ Peck, M. (28 May 2016). "Ethereum's $150-Million Blockchain-Powered Fund Opens Just as Researchers Call For a Halt". IEEE Spectrum. Institute of Electrical and Electronics Engineers.
  12. ^ Coy, Peter; Kharif, Olga (25 August 2016). "This Is Your Company on Blockchain". Bloomberg Businessweek. Retrieved 2016-12-05.
  13. ^ Nick Szabo (2005). "Secure Property Titles with Owner Authority". Retrieved January 12, 2014.
  14. ^ Jörg F. Wittenberger (2002). "Askemos a distributed settlement". {{cite web}}: Unknown parameter |booktitle= ignored (help)
  15. ^ "Proceedings of International Conference on Advances in Infrastructure for e-Business, e-Education, e-Science, and e-Medicine on the Internet" (PDF).
  16. ^ Martin Möbius (2009). "Erstellung eines Archivierungskonzepts für die Speicherung rückverfolgbarer Datenbestände im Askemos-System".
  17. ^ Tom-Steve Watzke (2010). "Entwicklung einer Datenbankschnittstelle als Grundlage für Shop-Systeme unter dem Betriebssystem Askemos".
  18. ^ RA Markus Heinker (2007). "Beweiswürdigung elektronischer Dokumente im Zivilprozess unter vergleichender Betrachtung von qualifizierten elektronischen Signaturen nach dem Signaturgesetz und dem Askemos-Verfahren".
  19. ^ Hal Hodson (20 November 2013). "Bitcoin moves beyond mere money". New Scientist. Retrieved 12 January 2014.
  20. ^ "Blockchain Technology: Preparing for Change" (PDF). Accenture.
  21. ^ Ross, Rory (2015-09-12). "Smart Money: Blockchains Are the Future of the Internet". Newsweek. Retrieved 2016-05-27.
  22. ^ Wigan, David (2015-06-11). "Bitcoin technology will disrupt derivatives, says banker". IFR Asia. Retrieved 2016-05-27.
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