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.
Smart contracts were first proposed in 1997 by computer scientist, legal scholar and cryptographer Nick Szabo, who coined the term. Contemporary ‘smart contract’ are software programs that interact with a blockchain or distributed ledger. In this interpretation, used for example by the Ethereum Foundation (a cryptocurrency) 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, which allow two nodes to communicate safely across a network, knowing that they are displaying the same data, allowed digital security through decentralization to form smart contracts.
As of 2015, 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 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 in 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.
The Daily Omnivore 