Smart contract

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Smart contracts are computer protocols intended to facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts were first proposed by Nick Szabo in 1996.[1]

Proponents of smart contracts claim that many kinds of contractual clauses may be made partially or fully self-executing, self-enforcing, or both. The aim with smart contracts is to provide security that is superior to traditional contract law and to reduce other transaction costs associated with contracting.

Smart contracts have been used primarily in association with cryptocurrencies. The most prominent smart contract implementation is the Ethereum blockchain platform.[2] The real-world smart contract that gained mainstream coverage was The DAO, a decentralized autonomous organization for venture capital funding, running on Ethereum, which was launched with US$250 million in crowdfunding in May 2016 and was hacked and drained of 3,689,577 ETH three weeks later.[3]

History[edit]

The phrase "smart contracts" was coined by Nick Szabo in 1996, and reworked over several years. Szabo's first publication, "Smart Contracts: Building Blocks for Digital Free Markets" was published in Extropy #16,[4] and then later reworked as "Formalizing and Securing Relationships on Public Networks."[5] These documents described how it would be possible to establish contract law and related business practices through the design of electronic commerce protocols, between strangers on the Internet. Szabo describes smart contracts as:

New institutions, and new ways to formalize the relationships that make up these institutions, are now made possible by the digital revolution. I call these new contracts "smart", because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied. A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises.[6]

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.[7]

With the present implementations, based on blockchains,[8] "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[9] or IBM[10], a smart contract is not necessarily related to the classical concept of a contract, but can be any kind of computer program.

Implementations[edit]

Systems such as Ethereum emerged after the first successful blockchain deployment. These were designed to achieve greater Turing completeness and create vast value chain ecologies.[clarification needed][11]

Notable examples of implementation of smart contract technology are:

Security issues[edit]

A smart contract is "a computerized transaction protocol that executes the terms of a contract."[13] 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.[14]

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.[15] 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.[16]

Issues in Ethereum smart contracts in particular include ambiguities and easy-but-insecure constructs in its contract language Solidity, compiler bugs, Ethereum Virtual Machine bugs, attacks on the blockchain network, the immutability of bugs and that there is no central source documenting known vulnerabilities, attacks and problematic constructs.[2]

Replicated titles and contract execution[edit]

Szabo proposes that smart contract infrastructure can be implemented by replicated asset registries[17] and contract execution using cryptographic hash chains and Byzantine fault tolerant replication. Askemos implemented this approach in 2002[18][19] using Scheme (later adding SQLite[20][21]) as contract script language.[22]

One proposal for using bitcoin for replicated asset registration and contract execution is called "colored coins".[23] 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.[24] As of 2015, UBS was experimenting with "smart bonds" that use the bitcoin blockchain[25] in which payment streams could hypothetically be fully automated, creating a self-paying instrument.[26]

In popular culture[edit]

Karl Schroeder's 2002 novel Permanence 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 each ship or it will stop working.

See also[edit]

References[edit]

  1. ^ "Nick Szabo -- Smart Contracts: Building Blocks for Digital Markets". www.fon.hum.uva.nl. Retrieved 2017-07-29. 
  2. ^ a b c Atzei, Nicola; Bartoletti, Massimo; Cimoli, Tiziana (2017), "A survey of attacks on Ethereum smart contracts" (PDF), 6th International Conference on Principles of Security and Trust (POST), European Joint Conferences on Theory and Practice of Software 
  3. ^ DuPont, Quinn (2017). "Experiments in Algorithmic Governance: A history and ethnography of “The DAO,” a failed Decentralized Autonomous Organization" (PDF). Bitcoin and Beyond. 
  4. ^ "Extropy Institute Resources". archive.is. 2013-11-15. Retrieved 2017-07-29. 
  5. ^ Szabo, Nick (1997-09-01). "Formalizing and Securing Relationships on Public Networks". First Monday. 2 (9). 
  6. ^ "Nick Szabo -- Smart Contracts: Building Blocks for Digital Markets". www.fon.hum.uva.nl. Retrieved 2017-07-29. 
  7. ^ Szabo, Nick (September 1997). "Formalizing and Securing Relationships on Public Networks". Firstmonday.org. First Monday. Retrieved 2016-12-15. 
  8. ^ Stafford, Philip; Murphy, Hannah. "Has the blockchain hype finally peaked?". ft.com. Financial Times. Retrieved 1 June 2017. 
  9. ^ Buterin, Vitalik. "Ethereum Whitepaper". github. Retrieved 1 June 2017. 
  10. ^ Cachin, Christian. "Architecture of the Hyperledger Blockchain Fabric" (PDF). ibm.com. 
  11. ^ 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. 
  12. ^ "An empirical study of Namecoin and lessons for decentralized namespace design" (PDF). 
  13. ^ 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. 
  14. ^ 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. 
  15. ^ DuPont, Quinn (2017). "Experiments in Algorithmic Governance: A history and ethnography of “The DAO,” a failed Decentralized Autonomous Organization" (PDF). Retrieved 29 July 2017. 
  16. ^ Coy, Peter; Kharif, Olga (25 August 2016). "This Is Your Company on Blockchain". Bloomberg Businessweek. Retrieved 2016-12-05. 
  17. ^ Nick Szabo (2005). "Secure Property Titles with Owner Authority". Retrieved January 12, 2014. 
  18. ^ Jörg F. Wittenberger (2002). "Askemos a distributed settlement". 
  19. ^ "Proceedings of International Conference on Advances in Infrastructure for e-Business, e-Education, e-Science, and e-Medicine on the Internet" (PDF). 
  20. ^ Martin Möbius (2009). "Erstellung eines Archivierungskonzepts für die Speicherung rückverfolgbarer Datenbestände im Askemos-System". 
  21. ^ Tom-Steve Watzke (2010). "Entwicklung einer Datenbankschnittstelle als Grundlage für Shop-Systeme unter dem Betriebssystem Askemos". 
  22. ^ RA Markus Heinker (2007). "Beweiswürdigung elektronischer Dokumente im Zivilprozess unter vergleichender Betrachtung von qualifizierten elektronischen Signaturen nach dem Signaturgesetz und dem Askemos-Verfahren". 
  23. ^ Hal Hodson (20 November 2013). "Bitcoin moves beyond mere money". New Scientist. Retrieved 12 January 2014. 
  24. ^ "Blockchain Technology: Preparing for Change" (PDF). Accenture. 
  25. ^ Ross, Rory (2015-09-12). "Smart Money: Blockchains Are the Future of the Internet". Newsweek. Retrieved 2016-05-27. 
  26. ^ Wigan, David (2015-06-11). "Bitcoin technology will disrupt derivatives, says banker". IFR Asia. Retrieved 2016-05-27. 

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