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Smart contract

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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.

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.

History

Smart contracts were first proposed in the early 1990s by computer scientist, lawyer and cryptographer Nick Szabo, who coined the term.[1][2] With the present implementations, based on blockchains,[3] "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[4] or IBM,[5] a smart contract is not necessarily related to the classical concept of a contract, but can be any kind of computer program.

A smart contract also can be regarded as a secured stored procedure as its execution and codified effects like the transfer of some value between parties are strictly enforced and can not be manipulated, after a transaction with specific contract details is stored into a blockchain or distributed ledger. That's because the actual execution of contracts is controlled and audited by the platform, not by any arbitrary server-side programs connecting to the platform.[6][7]

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."[8]

By implementing the Decree on Development of Digital Economy, Belarus has become the first-ever country to legalize smart contracts. Belarusian lawyer Denis Aleinikov is considered to be the author of a smart contract legal concept introduced by the decree.[9][10][11]

Implementations

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.[4][12]

Notable examples of implementation of smart contracts include the following:

  • Bitcoin 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.[13]
  • Ethereum implements a nearly Turing-complete language on its blockchain, a prominent smart contract framework.[14]
  • Ripple (Codius), smart contract development halted in 2015

Replicated titles and contract execution

Szabo proposes that smart contract infrastructure can be implemented by replicated asset registries[15] and contract execution using cryptographic hash chains and Byzantine fault-tolerant replication. Askemos implemented this approach in 2002[16][17] using Scheme (later adding SQLite[18][19]) as contract script language.[20]

One proposal for using bitcoin for replicated asset registration and contract execution is called "colored coins".[21] Replicated titles for potentially arbitrary forms of property, along with replicated contract execution, are implemented in different projects.

As of 2015, UBS was experimenting with "smart bonds" that use the bitcoin blockchain[22] in which payment streams could hypothetically be fully automated, creating a self-paying instrument.[23]

Security issues

A smart contract is "a computerized transaction protocol that executes the terms of a contract".[24] 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.[25]

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.[26] 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.[27]

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.[14]

See also

References

  1. ^ Morris, David Z. (21 January 2014). "Bitcoin is not just digital currency. It's Napster for finance". Fortune. Retrieved 7 November 2018.
  2. ^ Schulpen, Ruben R.W.H.G. (1 August 2018). "Smart contracts in the Netherlands - University of Tilburg". uvt.nl. Twente University. Retrieved 26 October 2019.
  3. ^ Stafford, Philip; Murphy, Hannah. "Has the blockchain hype finally peaked?". ft.com. Financial Times. Retrieved 1 June 2017.
  4. ^ a b Buterin, Vitalik. "Ethereum Whitepaper". github. Retrieved 1 June 2017.
  5. ^ Cachin, Christian. "Architecture of the Hyperledger Blockchain Fabric" (PDF). ibm.com.
  6. ^ Vo, Hoang Tam; Kundu, Ashish; Mohania, Mukesh (2018). "Research Directions in Blockchain Data Management and Analytics" (PDF). Advances in Database Technology - Extending Database Technology (EDBT). OpenProceedings. 21: 446. Some distributed ledger technologies support an additional capability called a smart contract, which is similar to the concept of stored procedure in classical relational databases to some extent. Smart contracts allow the shared business processes within a business network to be standardised, automated and enforced via computer programs to increase the integrity of the ledger.
  7. ^ Huckle, Steve; Bhattacharya, Rituparna; White, Martin; Beloff, Natalia (2016). "Internet of Things, Blockchain and Shared Economy Applications". Procedia Computer Science. Elsevier B.V. 98: 463. doi:10.1016/j.procs.2016.09.074. Firstly, that total quantity of BTC in a transaction's inputs must cover the total number of BTC in the outputs. That rule behaves similarly to a database stored procedure, except that it is impossible to circumvent. Secondly, BTC transactions use public-private key cryptography. That makes BTC act like a database with a publicly auditable per-row permission scheme.
  8. ^ Chapter 9: Building a Secure Future, One blockchain at a time, US Senate Joint Economic Committee, March 2018.
  9. ^ Makhovsky, Andrei (December 22, 2017). "Belarus adopts crypto-currency law to woo foreign investors". Reuters.
  10. ^ "Belarus Enacts Unique Legal Framework for Crypto Economy Stakeholders" (PDF). Deloitte. December 27, 2017.
  11. ^ Patricolo, Claudia (December 26, 2017). "ICT Given Huge Boost in Belarus". Emerging Europe.
  12. ^ Governatori, Guido; Idelberger, Florian; Milosevic, Zoran; Riveret, Regis; Sartor, Giovanni; Xu, Xiwei (2018). "On legal contracts, imperative and declarative smart contracts, and blockchain systems". Artificial Intelligence and Law. 26 (4): 33. doi:10.1007/s10506-018-9223-3.
  13. ^ Atzei, Nicola; Bartoletti, Massimo; Cimoli, Tiziana; Lande, Stefano; Zunino, Roberto (2018), "SoK: unraveling Bitcoin smart contracts" (PDF), 7th International Conference on Principles of Security and Trust (POST), European Joint Conferences on Theory and Practice of Software
  14. ^ a b 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
  15. ^ Nick Szabo (2005). "Secure Property Titles with Owner Authority". Archived from the original on January 15, 2014. Retrieved January 12, 2014.
  16. ^ Jörg F. Wittenberger (2002). "Askemos a distributed settlement".
  17. ^ "Proceedings of International Conference on Advances in Infrastructure for e-Business, e-Education, e-Science, and e-Medicine on the Internet" (PDF).
  18. ^ Martin Möbius (2009). "Erstellung eines Archivierungskonzepts für die Speicherung rückverfolgbarer Datenbestände im Askemos-System". Cite journal requires |journal= (help)
  19. ^ Tom-Steve Watzke (2010). "Entwicklung einer Datenbankschnittstelle als Grundlage für Shop-Systeme unter dem Betriebssystem Askemos". Cite journal requires |journal= (help)
  20. ^ RA Markus Heinker (2007). "Beweiswürdigung elektronischer Dokumente im Zivilprozess unter vergleichender Betrachtung von qualifizierten elektronischen Signaturen nach dem Signaturgesetz und dem Askemos-Verfahren".
  21. ^ Hal Hodson (20 November 2013). "Bitcoin moves beyond mere money". New Scientist. Retrieved 12 January 2014.
  22. ^ Ross, Rory (2015-09-12). "Smart Money: Blockchains Are the Future of the Internet". Newsweek. Retrieved 2016-05-27.
  23. ^ Wigan, David (2015-06-11). "Bitcoin technology will disrupt derivatives, says banker". IFR Asia. Retrieved 2016-05-27.
  24. ^ 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.
  25. ^ 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.
  26. ^ DuPont, Quinn (2017). "Experiments in Algorithmic Governance: A history and ethnography of "The DAO", a failed Decentralized Autonomous Organization" (PDF). Archived from the original (PDF) on 2017-07-30. Retrieved 29 July 2017.
  27. ^ Coy, Peter; Kharif, Olga (25 August 2016). "This Is Your Company on Blockchain". Bloomberg Businessweek. Retrieved 2016-12-05.