A Guide on the History of Smart Contracts

Beginner’s Guide / 27.04.2020

A traditional contract, which is still universally used to date, is a written document that frameworks cooperation. It includes the terms and conditions of a partnership or service agreement.

Contracts are traditionally written in a language that is perceivable and understandable to the humans who make it. The contracts include all the clauses, by-laws, and other important elements that eventually make it unfalsifiable.

But with the advent of the internet and other connective technologies, the paradigm of human readability and perception has transcended to mere 1’s and 0’s. In the 21st century, all the work is done by machines that work under human supervision. And so, there came a need for an infrastructure that could allow machines to make agreements. There was a need for a mechanism that could form contractual relationships between humans and machines.

Smart Contracts, which are neither smart nor contracts, were the first iteration of infrastructure for developing machine-readable enforceable contracts. The inaction didn’t just happen overnight but took decades of innovation and the advent of Blockchain to blossom fully. Let us take a look at the hurdles through which Smart Contracts had to pass through.

Nick Szabo – The Father of Smart Contracts

Smart contracts were first proposed in 1996 by Nick Szabo, an American computer scientist. Nick was previously infamous for inventing a virtual currency called “Bit Gold” in 1998 – fully 10 years before the invention of bitcoin. For that reason alone, Szabo is often rumored to be Satoshi Nakamoto, the bitcoin’s anonymous inventor, which he has denied.

In his original essay published in 1996 called “Smart Contracts: Building Blocks for Digital Markets,” Nick Szabo described a smart contract as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.” Since then, smart contracts have come to be known as one of the most crucial computer systems innovations. For his contributions to the field, Nick is known as the Father of Smart Contracts.

According to Nick, the execution of a traditional contract requires a human validation to check the terms and conditions and decide on the next steps according to the written agreement. Therefore, a traditional contract can be:

  • Time-consuming: checking the contract, validation, and approval, enabling the next steps, etc.
  • Resource consuming: execution of a traditional contract may require human intervention.
  • Costly: it may involve a third party. This is even true during a dispute.

Satoshi’s Bitcoin Blockchain

Technically, a smart contract can be designed and executed on a ‘blockchain-less’ platform for real-time use, as no mandatory base layer is specified in Nick Szabo’s first paper on the subject. But without a layer to run, execute, and enforce on, it diminishes the added capabilities that the integration of both platforms brings.

With the advent of Bitcoin and the Bitcoin Blockchain, Smart Contracts finally got a layer on which they can execute themself. To put in simple words, a smart contract was conceptualized to be a machine enforceable agreement wary of arbitration and centralized control. Since a blockchain is a decentralized infrastructure with no single point, smart contracts finally gained an infrastructure whose shoulders could reach its heights.

The Advent of Ethereum – Smart Contracts Resurrected

By 2010, all the elements that would eventually help Smart Contracts reach their full potential were in place. It would take someone as influential and broad-mined as Vitalik Buterin to bring them into the light.

The first revolutionary step into exposing Blockchain’s potential, Vitalik Buterin, released the Ethereum whitepaper in 2013. In that paper, he discussed all the drawbacks that bitcoin brings and is an open-source protocol that nobody can tamper with.

Ethereum brought several changes and improvements to the blockchain sector, which is touted to be the next technological revolution. Vitalik discussed in length how Nick had described the concept more than a decade ago and how Ethereum, being a “blockchain of blockchains,” would take the concept a step further by providing it a fertile ground to grow on.

What the Future Holds for Smart Contracts

Smart contract codes are uploaded into the blockchain to check the validity of a contract and enable the required steps. From its initialization, a smart contract is automatically executed. The main difference between a smart contract and a traditional contract is that a smart contract doesn’t rely on a third party; cryptographic code enforces it.

That concept alone, the process of removing third parties and letting machines do all the work, holds the potential to change the world. A smart contract can be used to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions, both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitrations and enforcement costs, and other transaction costs. By this, all forms of transaction-based relationships can be done with the help of a smart contract.

One can use smart contracts to revolutionize financial infrastructure (DeFi), Gaming (CryptoKitties), Certification (Argos/DiGiKYC), Computing (GNT), and hundreds of other sectors. The ICO boom that we witnessed in 2017 was in part because of Smart Contracts revolutionizing the concept of crowdfunding. In essence, waiting time, transaction cost, inefficiencies, and arbitration can be removed by introducing smart contracts. Only the future will show what the public decides to do with Smart Contracts and how they come to change our world.

Resources on Smart Contracts

For those interested in learning more, below are a set of resources that can help anyone know more about smart contracts. It includes videos on how they operate, how to code, and how to execute them.

Smart Contract Languages

Sudarshan M is a long time crypto-enthusiast. Pulled in by bitcoin early on, it did not take long for Sudarshan to divert all of his academic attention from business studies to blockchain by doing his Masters and eventually pursuing his PhD in the subject.