Smart contract

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 usually also have a user interface and 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. Smart contracts aim 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 description 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]

In a 2013 paper, Mark Miller and others have stressed capabilities^[4] as the security basis of smart contracts, in contrast to Chaum and other researchers in the financial cryptography community who have emphasized advanced cryptographic protocols to bring security and privacy to digital money, credentials, contract signing, auctions, and other commercial mechanisms.

Several formal languages have been developed or proposed for specifying contractual clauses.^[5][6][7] The IEEE has held two workshops on electronic contracting,^[8] which have furthered this research.

Within the recent hype around blockchain,^[9] "smart contract" is mostly used more specifically in the sense of general purpose computation that takes place on a blockchain.^[10] In this interpretation a smart contract is not necessarily related to the classical concept of a contract, but can be any kind of computer program.

Security issues

A smart contract is "a computerized transaction protocol that executes the terms of a contract,"^[2] it is not inherently "smart" as a separate attribute of contract type.^[11] 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.^[12] 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 program on the blockchain had time requirements in place before the hacker could access the funds, and remove funds from The DAO contract. A hard fork of the blockchain was done to claw back the funds from the attacker before the time limit expired.^[13]

Replicated titles and contract execution

A smart contracts infrastructure can be implemented by replicated asset registries^[14] and contract execution using cryptographic hash chains and Byzantine fault tolerant replication. Each node in the peer-to-peer network acts as a title registry and escrow, executing changes of ownership and automatically checkable rules governing those transactions, and checks the same work of other nodes. Askemos implemented this approach in 2002 using Scheme as contract script language. Cryptocurrencies such as bitcoin have implemented special cases of such registries, where the property is money. Bitcoin and many of its spin-offs contain mechanisms to enable more general property titles and contract execution. Code supporting this is a latent part of the bitcoin protocol, based on probabilistic and anonymous (proof-of-work based) Byzantine replication. One proposal for using bitcoin for replicated asset registration and contract execution is called "colored coins".^[15] A replicated domain name registry is implemented in Namecoin; replicated titles for potentially arbitrary forms of property, along with replicated contract execution, are implemented in Crypti, Ripple, Mastercoin and Ethereum.^[16][17] NXT^[18] implements replicated property titles based on proof-of-stake in the underlying currency.

Smart contracts can be implemented with the Ricardian Contract design pattern.^[19][20]

Applications may include financial instruments such as bonds, shares, and derivatives, assurance contracts, and other instruments and transactions where the nodes can monitor the events on which the smart contract rules are conditioned. Advantages of a smart contract over its equivalent conventional financial instrument include minimizing counterparty risk, reducing settlement times, and increased transparency.^[21] As of 2015, UBS was experimenting with "smart bonds" that use the bitcoin blockchain^[22] in which payment streams could be fully automated, creating a self-paying instrument.^[23]

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.

See also

• Code and Other Laws of Cyberspace
• Decentralized autonomous organization
• Ethereum
• Secure multiparty computation

References

External links

• The Idea of Smart Contracts
• erights.org: Smart Contracts
• The E Language: Cryptographic Capabilities for Distributed Smart Contracting
• The Digital Path: Smart Contracts and the Third World
• "Late on payments? Device won't let car engine start."
• Open-Transactions: open-source Smart Contracts