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Proponents of smart contracts claim that many kinds of contractual clauses may 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 most prominent smart contract implementation is the Ethereum blockchain platform. The real-world smart contract that gained mainstream coverage was The DAO, a distributed autonomous organization for venture capital funding, running on Ethereum, 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.
The phrase "smart contracts" was coined by computer scientist Nick Szabo in 1994, with the goal of bringing contract law and related business practices to the design of electronic commerce protocols between strangers on the Internet:
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.
Within the recent hype around blockchain, "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.
Ethereum and Monax, emerged after the first successful blockchain deployment. These were designed to achieve greater Turing completeness and create vast value chain ecologies.[clarification needed]
Notable examples of implementation of smart contract technology are:
- Blackcoin supports smart contracts via the Black Halo project created by David Zimbeck based on a proof-of-stake driven blockchain.
- Ethereum implements a turing complete language on their blockchain. It is the most-used smart contract platform.
- Mastercoin
- Namecoin A replicated domain name registry.
- Ripple,
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 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.
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.
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.
- Augur an open-source and decentralized prediction market platform built on Ethereum
- Code and Other Laws of Cyberspace
- Secure multiparty computation
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