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A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible. Smart contracts were first proposed by Nick Szabo, who coined the term, in 1994.
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 of smart contracts is to provide security that is superior to traditional contract law and to reduce other transaction costs associated with contracting. Various cryptocurrencies have implemented types of smart contracts.
With the present implementations, based on blockchains, "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 or IBM, a smart contract is not necessarily related to the classical concept of a contract, but can be any kind of computer program.
In 2018, a US Senate report said: "While smart contracts might sound new, the concept is rooted in basic contract law. Usually, the judicial system adjudicates contractual disputes and enforces terms, but it is also common to have another arbitration method, especially for international transactions. With smart contracts, a program enforces the contract built into the code."
Byzantine fault tolerant algorithms allowed digital security through decentralization to form smart contracts. Additionally, the programming languages with various degrees of Turing-completeness as a built-in feature of some blockchains make the creation of custom sophisticated logic possible.
Notable examples of implementation of smart contracts are:
- Decentralized cryptocurrency protocols are smart contracts with decentralized security, encryption, and limited trusted parties that fit Szabo's definition of a digital agreement with observability, verifiability, privity, and enforceability.
- Bitcoin also provides a Turing-incomplete Script language that allows the creation of custom smart contracts on top of Bitcoin like multisignature accounts, payment channels, escrows, time locks, atomic cross-chain trading, oracles, or multi-party lottery with no operator.
- Ethereum implements a nearly Turing-complete language on its blockchain, a prominent smart contract framework.
- RootStock (RSK) is a smart contract platform that is connected to the Bitcoin blockchain through sidechain technology. RSK is compatible with smart contracts created for Ethereum.
- Namecoin is a replicated domain name registry.
- Ripple (Codius), smart contract development halted in 2015
- Automated Transactions is another Turing complete smart contract language, used in cryptocurrencies like Burstcoin and Qora. An example for its usage is atomic cross-chain trading.
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. Askemos implemented this approach in 2002 using Scheme (later adding SQLite) as contract script language.
One proposal for using bitcoin for replicated asset registration and contract execution is called "colored coins". 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. As of 2015[update], 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.
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 yet may not 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 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.
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.
In popular culture
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.
- Code and Other Laws of Cyberspace
- Secure multiparty computation
- Ricardian contract (a design pattern to capture the intent of the agreement of parties)
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