The term “smart contract” is often thrown around in the tech world, particularly when talking about cryptocurrencies. The term is mainly used to describe computer code that automatically executes all or parts of an agreement stored on a blockchain.
Nevertheless, smart contracts can be much more rudimentary, and, although “smart,” they aren’t really intelligent and make no use of AI. So, what are smart contracts? And, how do they work?
What Are Smart Contracts?
The term was used for the first time in the 1990s by computer scientist and cryptographer Nick Szabo.
In his article “Smart Contracts: Building Blocks for Digital Markets,” Szabo describes smart contracts as “new institutions, and new ways to formalize these institutions […] […] made possible by the digital revolution”. He calls them “smart” because of their higher functionality than their paper-based ancestors while highlighting no use of artificial intelligence is implied.
In fact, the most basic example of a smart contract is that of a vending machine. When a purchaser meets the conditions of the “contract” by putting money into the machine, it automatically honors the terms of the agreement and turns over the product. Of course, more sophisticated forms of smart contracts are used for exchanging blockchain-based cryptocurrencies.
Szabo goes on to define smart contracts as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”
How Do Smart Contracts Work?
At the moment, smart contracts are best suited for two types of transactions present in many contracts: making sure that a payment is made once specific conditions are met and imposing financial penalties if certain conditions are not satisfied.
As such, their main function is to execute certain provisions, such as transferring funds from one party’s wallet to another. In other words, if “x” happens, then step “y” is executed as a response. Then, the smart contract itself is replicated through several blockchain nodes, benefiting from the security and immutability that the blockchain offers.
How “Smart” Are Smart Contracts?
Szabo’s decision to highlight that smart contracts aren’t actually “intelligent” is highly important. Smart contracts may be smarter than their paper-based counterparts, being able to execute some pre-programmed steps automatically, but they still can’t analyze a contract’s more subjective provisions.
This means that the tasks smart contracts can actually perform are fairly rudimentary. Although smart contracts will become more complex and capable of tackling sophisticated transactions as the adoption of blockchain technology spreads, we are still years away from smart contracts determining subjective legal criteria.
0 Comments