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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.”
Person working on computer
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.
Man selecting items from a vending machine
The forebears of modern-day smart contracts include:
  • 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

From these early examples, it is possible to distill at least four key 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

While these features may limit the application of smart contracts, the features are directly related to the potential of smart contracts. According to Szabo, the objectives of smart contract design is to minimise breaches of contractual obligations (malicious and accidental), minimise the need for trusted intermediaries to verify and enforce contractual performance, ultimately reducing transaction costs. This implies a greater capacity for contracting in the digital environment.

Blockchain Smart Contracts

Blockchain technology provides a decentralised infrastructure for a new generation of smart contracts. In this way, smart contracts run “on the top” of the blockchain base layer which sees a blockchain network evolving from a simple record of digital transactions to a “general computational” platform where decentralised computer programs (DApps) can be stored and executed in a decentralised ecosystem. Accordingly, RMIT blockchain researchers build on Szabo’s classic definition to define blockchain-enabled smart contracts as “agreements – or parts of agreements – that are coded to operate within a decentralised or distributed blockchain network, and that can be automatically executed by that network when specific conditions are validated.”
There is no single blockchain network for smart contracts, although Ethereum is the most popular with its “Ethereum Virtual Machine” (EVM).
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
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.
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