A smart contract is a computer program that executes agreements between two or more parties that result in certain actions when certain conditions are met. That is, when a previously programmed condition is activated, the smart contract automatically executes the corresponding agreement. If we consider a conventional contract and a smart contract, we can say exactly that they are both agreements in which two or more parties agree to abide by a series of conditions. Their fundamental elements are the same: the voluntary agreement of all parties, the object of the contract (goods or services), and a single purpose. However, both differ in three factors: the way they are written, their legal implications, and the concept of compliance.
History of smart contracts
The term “smart contracts” was coined by software scientist Nick Szabo, probably in 1993, to explain the purpose of introducing what he called the “highly evolved” stage of contract law and related business practices in e-commerce into protocol development. Sabo, inspired by researchers such as David Chaum, also believed that the development of smart contracts through the execution of cryptographic protocols and other digital security mechanisms could be a significant improvement over traditional legal contracts.
Szabo used the word “smart” in quotes and stated that artificial intelligence would not be involved. He gave a classic example of a smart contract: it is a vending machine. If the terms of the “contract” suit the buyer (i.e. he puts money into the machine), then the machine automatically honors the unwritten agreement and provides the purchase.
Several formal languages have now been developed and have been proposed to define the terms of the contract. At the moment, there are many working groups specializing in smart contracts, which contribute to the continuation of this research in the future. Before blockchain, there was no platform that could make smart contracts a reality, so it was only defined conceptually.
How do smart contracts work?
Smart contracts are entirely digital and written in a programming language. In addition to establishing obligations and consequences in the same way as a normal physical document, the code can be executed automatically. Consequently, it can receive and process information related to the negotiation, already taking action according to the rules of the contract. BTC is limited in its use of tokens for financial transfers.
The Ethereum platform replaces the more limited BTC language (a scripting language of about a hundred) with a language that allows developers to specify their own scripts. Ethereum allows developers to program their own smart contracts. The language is “full Turing,” which means it supports a broader toolkit of computational instructions.
The Ethereum platform has been used to distribute decentralized applications (DApps). Instead of multiple applications managed by many protocols, Ethereum allows all applications to be managed by a single protocol.
Ethereum is a platform that allows developers to create any program, and run it on basic blockchain functions, using smart contracts to automatically perform their actions by triggering predefined conditions built into the algorithm. If the conditions are met, the specified function is automatically terminated without the need to take any action.
Benefits of Smart Contracts
Using smart contracts, there is no longer a need to enlist the help of a third party, such as a lawyer or notary public, which, in addition to possible errors, incurs significant costs. Blockchain is able to protect information on an encrypted network that can be accessed from anywhere in the world, so speed and security are obvious. The most important advantages of contracts are:
Autonomy
These contracts are always between one or more individuals or entities, but without intermediaries. No lawyer is required to validate the contract. Therefore, the parties reduce and can even eliminate any unnecessary person who is not involved in the contract.
Reduced costs
Because contracts do not depend on a third party, costs are reduced. Less human intervention leads to lower costs.
