Terry Smart contracts are computer programs that can automatically enforce the terms of a contract. One day, these programs may replace lawyers and banks that handle certain financial transactions. The main reason blockchain is considered a disruptive technology is the ability to implement smart contracts on the blockchain.
Smart contracts have the potential to do much more than simply transfer money. A lock on a car or house must be linked to a smart contract on the Internet of Things to open it. But as with all financial frontier technologies, the main question for smart contracts is: how will they fit into our current legal system? Will anyone actually use smart contracts?
The idea of smart contracts dates back to 1994, almost simultaneously with the advent of the Internet. Cryptographer Nick Szabo, who is widely credited with laying the groundwork for Bitcoin, first coined the term “smart contract. His definition of a smart contract is, ” A smart contract is a digitally defined set of promises, including agreements by which contracting parties can enforce those promises.”
Essentially, these automated contracts work in a similar way to the if-then statements of other computer programs. Smart contracts simply interact with real-world assets in this way. When a pre-programmed condition is triggered, the smart contract executes the corresponding contractual terms.
Smart means intelligent and flexible, but not yet at the level of “artificial intelligence”. So some people just take it literally, they think they have to reach “artificial intelligence” to be considered a smart contract. But in fact, just like a “smartphone”, “smart” here only means that it can be defined and operated flexibly.
Sabo’s theory of how smart contracts work has so far not been realized in practice because, until today, no digital financial system has been born that can support programmable transactions.
Because the goal of smart contracts cannot be achieved if banks still need to manually approve the transfer of funds. So, it can be argued that a major barrier to implementing smart contracts is that today’s computer programs cannot actually trigger payments.
The emergence and widespread use of Bitcoin are changing the status quo that has prevented smart contracts from being implemented, thus giving Sabo’s theory a chance to be reborn.
Smart contract technology is now being built on top of bitcoin and other digital currencies – what some call blockchain 2.0 platforms. Because most digital currencies based on blockchain technology are themselves computer programs, smart contracts can interact with them just as they can with other programs.
So, with the creation of blockchain technology, these issues are gradually being addressed and it is already possible to trigger payments through a computer program. Cryptographic digital currencies like Bitcoin based on blockchain technology are ready to help make smart contracts a reality, and eventually, there will likely be a win-win for both digital currencies and smart contracts.
Smart contracts can explain the unique benefits of digital currencies to people, and this will attract more users to digital currencies. From this point of view, perhaps smart contracts are the real “killer app” for digital currencies.
In the blockchain environment, contracts or smart contracts mean that blockchain transactions will go far beyond the simple buying and selling of currency, and will have a much wider range of instructions that can be embedded in the blockchain. In a more formal definition, a contract is the use of bitcoin to form some sort of agreement with someone via the blockchain.
A contract in the traditional sense is an agreement between two or more parties to do or not do something in exchange for something. Either party to the contract must trust each other and fulfil their obligations.
The thing about smart contracts is that they agree or disagree to do something, but they don’t have to trust each other anymore. This is because smart contracts are not only defined by code but are also (enforced) by code, completely automatically and without intervention.
In fact, first of all, smart contracts are so because of three elements: autonomy, self-sufficiency and decentralization.
Autonomy means that once a contract is started, it runs automatically, without any intervention by its initiator.
Second, smart contracts are self-sufficient in terms of access to resources, i.e., they provide services or issue assets to obtain funds and use those funds when they are needed.
Finally, smart contracts are decentralized, meaning that they do not rely on a single centralized server, but are distributed and run automatically through a network of nodes.
To use an analogy for smart contracts, think of them as automatic vending machines written in code and running automatically. Unlike human behavior, the behavior of a vending machine is computable; the same commanded behavior always yields the same result.
When you insert some money and make a choice, the item of your choice will fall out. The machine can never execute against a predetermined program, nor will it execute only part of it (as long as it is not broken).
The same is true of a smart contract, which must follow a predetermined code. In the world of blockchain and smart contracts, “code is law” and it will be enforced no matter how it is written. In some cases, this may or not may be a good thing; whether it is or not, it will be a completely new situation, and our society will have a long period of adjustment before smart contracts become commonplace.
Smart contracts and their associated systems based on cryptographic algorithms have many details to consider if they are to be able to activate assets. Perhaps we also need entirely new laws and regulations that distinguish between contracts created by code and judicially binding contracts created by people. Only contracts based on the human agreement are subject to compliance or breach, whereas blockchain-based contracts and any code-based contracts are not.
Moreover, smart contracts will not only affect contract law but may affect other social contracts in society at large. The need to determine and define what social contracts will require more “code laws,” i.e., automatically enforceable and unstoppable based on code.
The need to identify and define which social contracts will require more “code laws,” i.e., self-executing laws that cannot be prevented from operating. Because it is virtually impossible to make intelligent contracts enforceable based on currently enacted laws (e.g., a decentralized code sample is difficult to control, regulate, or require damages after the fact), the existing legal framework would essentially reduce such behavior to the level of artificial contracts.
The ultimate goal would not be no law or anarchy, but rather a legal framework that is more fine-grained and personalized to the context. Parties could negotiate a legal framework to create a contract and then write it into the code.
This would be based on an already known, vetted, and “archaic” legal framework, similar to Creative Commons Licenses, so that users could choose a legal framework as the framework for a smart contract. As a result, there may be as many types of legal frameworks as there are currencies. Smart contracts are not meant to do everything that can’t be done.
In fact, they can solve common things in a way that minimizes trust. Minimizing trust makes things easier because it replaces autonomous human judgment with fully automated execution.
