A smart contract is a computer program or a transaction protocol that is intended to automatically execute, control or document events and actions according to the terms of a contract or an agreement. [1] [2] [3] [4] The objectives of smart contracts are the reduction of need for trusted intermediators, arbitration costs, and fraud losses, as well as the reduction of malicious and accidental exceptions. [5] [2] Smart contracts are commonly associated with cryptocurrencies, and the smart contracts introduced by Ethereum are generally considered a fundamental building block for decentralized finance (DeFi) and non-fungible token (NFT) applications. [6] [7]
The original Ethereum white paper by Vitalik Buterin in 2014 [8] describes the Bitcoin protocol as a weak version of the smart contract concept as originally defined by Nick Szabo, and proposed a stronger version based on the Solidity language, which is Turing complete. Since Bitcoin,[ clarification needed ] various cryptocurrencies have supported programming languages which allow for more advanced smart contracts between untrusted parties. [9]
A smart contract should not be confused with a smart legal contract, which refers to a traditional, natural-language, legally-binding agreement that has selected terms expressed and implemented in machine-readable code. [10] [11] [12]
By 1996, Nick Szabo was using the term "smart contract" to refer to contracts which would be enforced by physical property (such as hardware or software) instead of by law. Szabo described vending machines as an example of this concept. [13] [14] In 1998, the term was used to describe objects in rights management service layer of the system The Stanford Infobus, which was a part of Stanford Digital Library Project. [1]
A smart contract does not typically constitute a valid binding agreement at law. [15] Proposals exist to regulate smart contracts. [10] [11] [12]
Smart contracts are not legal agreements, but instead transactions which are executed automatically by a computer program or a transaction protocol, [15] such as technological means for the automation of payment obligations [16] such as by transferring cryptocurrencies or other tokens. Some scholars have argued that the imperative or declarative nature of programming languages would impact the legal validity of smart contracts. [17]
Since the 2015 launch of the Ethereum blockchain, the term "smart contract" has been applied to general purpose computation that takes place on a blockchain. The US National Institute of Standards and Technology describes a "smart contract" as a "collection of code and data (sometimes referred to as functions and state) that is deployed using cryptographically signed transactions on the blockchain network". [18] In this interpretation a smart contract is any kind of computer program which uses a blockchain. A smart contract also can be regarded as a secured stored procedure, as its execution and codified effects (like the transfer of tokens between parties) cannot be manipulated without modifying the blockchain itself. In this interpretation, the execution of contracts is controlled and audited by the platform, not by arbitrary server-side programs connecting to the platform. [19] [20]
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." [21] States in the US which have passed legislation on the use of smart contracts include Arizona, [22] Iowa, [23] Nevada, [24] Tennessee, [25] and Wyoming. [26]
In April 2021, the UK Jurisdiction Taskforce (UKJT) published the Digital Dispute Resolution Rules (the Digital DR Rules), which were intended to enable the rapid resolution of blockchain and crypto legal disputes in Britain. [27]
Similar to a transfer of value on a blockchain, deployment of a smart contract on a blockchain occurs by sending a transaction from a wallet for the blockchain. [28] The transaction includes the compiled code for the smart contract as well as a special receiver address. [28] That transaction must then be included in a block that is added to the blockchain, at which point the smart contract's code will execute to establish the initial state of the smart contract. [28] Byzantine fault-tolerant algorithms secure the smart contract in a decentralized way from attempts to tamper with it. Once a smart contract is deployed, it cannot be updated. [29] Smart contracts on a blockchain can store arbitrary state and execute arbitrary computations. End clients interact with a smart contract through transactions. Such transactions with a smart contract can invoke other smart contracts. These transactions might result in changing the state and sending coins from one smart contract to another or from one account to another. [29]
The most popular blockchain for running smart contracts is Ethereum. [30] On Ethereum, smart contracts are typically written in a Turing-complete programming language called Solidity, [31] and compiled into low-level bytecode to be executed by the Ethereum Virtual Machine. [32] Due to the halting problem and other security problems, Turing-completeness is considered to be a risk and is deliberately avoided by languages like Vyper. [33] [34] Some of the other smart contract programming languages missing Turing-completeness are Simplicity, Scilla, Ivy and Bitcoin Script. [34] However, measurements in 2020 using regular expressions showed that only 35.3% of 53,757 Ethereum smart contracts at that time included recursions and loops — constructs connected to the halting problem. [35]
Several languages are designed to enable formal verification: Bamboo, IELE, Simplicity, Michelson (can be verified with Coq), [34] Liquidity (compiles to Michelson), Scilla, DAML and Pact. [33]
| Name | Description |
|---|---|
| Ethereum | Implements a Turing-complete language on its blockchain, a prominent smart contract framework [36] |
| 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. [37] |
| Binance Smart Chain | A blockchain platform for smart contracts |
| Cardano | A blockchain platform for smart contracts, using proof of stake |
| Solana | A blockchain platform for smart contracts |
| Avalanche | A blockchain platform for smart contracts |
| Tron | A blockchain platform for smart contracts |
| EOS.IO | A blockchain platform for smart contracts |
| Tezos | A blockchain platform modifying its own set of rules with minimal disruption to the network through an on-chain governance model |
Processes on a blockchain are generally deterministic in order to ensure Byzantine fault tolerance. [38] Nevertheless, real world application of smart contracts, such as lotteries and casinos, require secure randomness. [39] In fact, blockchain technology reduces the costs for conducting of a lottery and is therefore beneficial for the participants. Randomness on blockchain can be implemented by using block hashes or timestamps, oracles, commitment schemes, special smart contracts like RANDAO [40] [41] and Quanta, as well as sequences from mixed strategy Nash equilibria. [38]
In 1998, Szabo proposed that smart contract infrastructure can be implemented by replicated asset registries and contract execution using cryptographic hash chains and Byzantine fault-tolerant replication. [42] Askemos implemented this approach in 2002 [43] [44] using Scheme (later adding SQLite [45] [46] ) as the contract script language. [47]
One proposal for using Bitcoin for replicated asset registration and contract execution is called "colored coins". [48] Replicated titles for potentially arbitrary forms of property, along with replicated contract execution, are implemented in different projects.
As of 2015 [update] , UBS was experimenting with "smart bonds" that use the bitcoin blockchain [49] in which payment streams could hypothetically be fully automated, creating a self-paying instrument. [50]
Inheritance wishes could hypothetically be implemented automatically upon registration of a death certificate by means of smart contracts.[ according to whom? ] [51] [52] Birth certificates can also work together with smart contracts. [53] [54]
Chris Snook of Inc.com suggests smart contracts could also be used to handle real estate transactions and could be used in the field of title records and in the public register. [55] [56] [57] [58] [59]
Seth Oranburg and Liya Palagashvili argue that smart contracts could also be used in employment contracts, especially temporary employment contracts, which according to them would benefit the employer. [60] [61]
The transactions data from a blockchain-based smart contract is visible to all users in the blockchain. The data provides cryptographic view of the transactions, however, this leads to a situation where bugs, including security holes, are visible to all yet may not be quickly fixed. [62] Such an attack, difficult to fix quickly, was successfully executed on The DAO in June 2016, draining approximately US$50 million worth of Ether at the time, while developers attempted to come to a solution that would gain consensus. [63] 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. [64] Other high-profile attacks include the Parity multisignature wallet attacks, and an integer underflow/overflow attack (2018), totaling over US$184 million. [65]
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. [36]
Smart legal contracts are distinct from smart contracts. As mentioned above, a smart contract is not necessarily legally enforceable as a contract. On the other hand, a smart legal contract has all the elements of a legally enforceable contract in the jurisdiction in which it can be enforced and it can be enforced by a court or tribunal. Therefore, while every smart legal contract will contain some elements of a smart contract, not every smart contract will be a smart legal contract. [66]
There is no formal definition of a smart legal contract in the legal industry. [67]
A Ricardian contract is a type of smart legal contract.[ citation needed ]
Solidity is a programming language for implementing smart contracts on various blockchain platforms, most notably, Ethereum. Solidity is licensed under GNU General Public License v3.0. Solidity was designed by Gavin Wood and developed by Christian Reitwiessner, Alex Beregszaszi, and several former Ethereum core contributors. Programs in Solidity run on Ethereum Virtual Machine or on compatible virtual machines.
A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It has, from a financial point of view, grown to be its own asset class. However, on the contrary to other asset classes like equities or commodities, sectors have not been officially defined as of yet, though abstract versions of them exist.
Litecoin is a decentralized peer-to-peer cryptocurrency and open-source software project released under the MIT/X11 license. Inspired by Bitcoin, Litecoin was among the earliest altcoins, starting in October 2011. In technical details, the Litecoin main chain shares a slightly modified Bitcoin codebase. The practical effects of those codebase differences are lower transaction fees, faster transaction confirmations, and faster mining difficulty retargeting. Due to its underlying similarities to Bitcoin, Litecoin has historically been referred to as the "silver to Bitcoin's gold." In 2022, Litecoin added optional privacy features via soft fork through the MWEB upgrade.
Ethereum is a decentralized blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capitalization. It is open-source software.
A decentralized autonomous organization (DAO), sometimes called a decentralized autonomous corporation (DAC), is an organization managed in whole or in part by decentralized computer program, with voting and finances handled through a blockchain. In general terms, DAOs are member-owned communities without centralized leadership. The precise legal status of this type of business organization is unclear.
Counterparty is a peer-to-peer financial platform and a distributed, open source protocol built on top of the Bitcoin blockchain and network. It was one of the most well-known "Bitcoin 2.0" platforms in 2014, along with Mastercoin, Ethereum, Colored Coins, Ripple and BitShares.
A blockchain is a distributed ledger with growing lists of records (blocks) that are securely linked together via cryptographic hashes. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. Since each block contains information about the previous block, they effectively form a chain, with each additional block linking to the ones before it. Consequently, blockchain transactions are irreversible in that, once they are recorded, the data in any given block cannot be altered retroactively without altering all subsequent blocks.
Hyperledger is an umbrella project of open source blockchains and related tools that the Linux Foundation started in December 2015. IBM, Intel, and SAP Ariba have contributed to support the collaborative development of blockchain-based distributed ledgers. It was renamed the Hyperledger Foundation in October 2021.
Joseph Lubin is a Canadian-American businessman. He has founded and co-founded several companies, including the Swiss-based EthSuisse, contributing heavily to Ethereum, the decentralized cryptocurrency platform. Lubin is the founder of ConsenSys, a Brooklyn-based software production studio.
The DAO was a digital decentralized autonomous organization and a form of investor-directed venture capital fund. After launching in April 2016 via a token sale, it became one of the largest crowdfunding campaigns in history, but it ceased activity after much of its funds were taken in a hack in June 2016.
A decentralised application is an application that can operate autonomously, typically through the use of smart contracts, that run on a decentralized computing, blockchain or other distributed ledger system. Like traditional applications, DApps provide some function or utility to its users. However, unlike traditional applications, DApps operate without human intervention and are not owned by any one entity, rather DApps distribute tokens that represent ownership. These tokens are distributed according to a programmed algorithm to the users of the system, diluting ownership and control of the DApp. Without any one entity controlling the system, the application is therefore decentralised.
A smart bond is a specific type of an automated bond contract that uses the capabilities of blockchain databases that can operate as cryptographically-secure yet open and transparent general ledgers. This is sometimes referred to as Distributed Ledger Technology (DLT). It is one of a class of financial instruments known as a smart contract, "a computerized transaction protocol that executes the terms of a contract."
Ethereum Classic is a blockchain-based distributed computing platform that offers smart contract (scripting) functionality. It is open source and supports a modified version of Nakamoto consensus via transaction-based state transitions executed on a public Ethereum Virtual Machine (EVM).
Cardano is a public blockchain platform. It is open-source and decentralized, with consensus achieved using proof of stake. It can facilitate peer-to-peer transactions with its internal cryptocurrency, ADA.
A cryptocurrency wallet is a device, physical medium, program or an online service which stores the public and/or private keys for cryptocurrency transactions. In addition to this basic function of storing the keys, a cryptocurrency wallet more often offers the functionality of encrypting and/or signing information. Signing can for example result in executing a smart contract, a cryptocurrency transaction, identification, or legally signing a 'document'.
Distributed ledger technology law is not yet defined and recognized but an emerging field of law due to the recent dissemination of distributed ledger technology application in business and governance environment. Those smart contracts which were created through interaction of lawyers and developers and are intended to also be enforceable legal contracts are called smart legal contracts.
Cryptoeconomics is an evolving economic paradigm for a cross-disciplinary approach to the study of digital economies and decentralized finance (DeFi) applications. Cryptoeconomics integrates concepts and principles from traditional economics, cryptography, computer science, and game theory disciplines. Just as traditional economics provides a theoretical foundation for traditional financial services, cryptoeconomics provides a theoretical foundation for DeFi services bought and sold via fiat cryptocurrencies, and executed by smart contracts.
Tezos is an open-source blockchain that can execute peer-to-peer transactions and serve as a platform for deploying smart contracts. The native cryptocurrency for the Tezos blockchain is the tez. The Tezos network achieves consensus using proof-of-stake. Tezos uses an on-chain governance model that enables the protocol to be amended when upgrade proposals receive a favorable vote from the community. Its testnet was launched in June 2018, and its mainnet went live in September 2018.
Decentralized finance offers financial instruments and operations through smart contracts on a programmable permissionless blockchain, thus minimizing the reliance on intermediaries such as brokerages, exchanges, or banks. DeFi platforms allow people to lend or borrow funds from others, speculate on price movements of assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts. The DeFi ecosystem uses a layered architecture and highly composable building blocks. While some applications promote high interest rates, they are subject to high risks. Coding errors and hacks have been common in DeFi.
Chainlink is a decentralized blockchain oracle network built on Ethereum. The network is intended to be used to facilitate the transfer of tamper-proof data from off-chain sources to on-chain smart contracts.
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.
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.
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