What are Smart Contracts Used For?

The idea of smart contracts dates to the 1990s. Writing in 1994, the computer scientist Nick Szabo defined a smart contract as “a computerised transaction protocol that executes the terms of a contract.”

I call these new contracts “smart”, because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied. A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises. Nick Szabo.

• Vending machines, where the computer code running the machine automatically dispenses the selected product, provided that the product is available and sufficient funds have been inserted into the machine.
• Point-of-sale terminals and cards that execute payments between retailers and customers, provided that the card is honoured by the financial institution.
• Electronic data interchange, where business transactions are conducted between organisations in a standard format that allows one party to perform aspects of the transaction on receiving information (e.g., purchase orders, shipping information, statements, remittance advice).

Features of a Smart Contract

• Smart contracts exist in an electronic or digital form.
• Smart contracts are designed to automatically execute when predetermined conditions are met.
• The conditions are generally expressed in the logic of “If x occurs, then y executes” – creating a binary outcome.
• For the contract to work the conditions and execution steps must be able to be specific and objectively defined to be written into computer code (so there is no room for qualitative judgement or human discretion).

The Potential of Smart Contracts

Blockchain Smart Contracts

In practice, participants don’t write new code every time they want to request a computation on the EVM. Rather, application developers upload programs (reusable snippets of code) into EVM storage and then users make requests for the execution of these code snippets with varying parameters. We call the programs uploaded to and executed by the network smart contracts… Any developer can create a smart contract and make it public to the network, using the blockchain as its data layer, for a fee paid to the network. Any user can then call the smart contract to execute its code… for a fee paid to the network.

Further Uses for Smart Contracts

Researchers and entrepreneurs have identified a wide range of potential use cases for smart contracts including:

• Creative industry licensing
• Democratic governance
• Dispute resolution
• Financial transactions
• Supply chain management and logistics

Smart Contracts and Smart Legal Contracts

The term “contract” has different meanings for computer scientists compared to lawyers. For smart contracts to be an enforceable contract under Common Law it must satisfy the traditional elements of a common law contract (the existence of an agreement, an intention for the parties to create a legally binding relationship, consideration – usually in the form of valuable payment, and compliance with any regulatory formalities). These elements will be assessed on a case-by-case basis considering all the relevant factual evidence. As smart contracts become more widely used to conduct business, it is inevitable that disputes will arise and dispute resolution mechanisms will be needed.