What is a smart contract?

What is a smart contract?

A smart contract is a self-executing contract with the terms of the contract between the buyer and the seller written directly into lines of code. The code and the contracts contained within it exist in a distributed, decentralized blockchain network. Code controls execution, and transactions are traceable and irreversible.

Smart contracts allow the execution of trusted transactions and agreements between different, anonymous parties without the need for a central authority, legal system or external enforcement mechanism. While blockchain technology began to be seen primarily as the foundation for bitcoin, it has evolved far beyond underpinning virtual currency.

Smart contracts were first proposed in 1994 by Nick Szabo, an American computer scientist who invented a virtual currency called "Bit Gold" in 1998, a full 10 years before the invention of Bitcoin. In fact, Szabo is often rumored to be the real Satoshi Nakamoto, the anonymous inventor of Bitcoin, which he denies. Szabo defined smart contracts as computer transaction protocols that execute the terms of the contract. He wanted to extend the functionality of electronic transaction methods, such as POS (point of sale), into the digital realm.

In his work, Szabo also proposed the execution of contracts for synthetic assets, such as derivatives and bonds. Szabo wrote: “These new securities are created by combining securities (such as bonds) and derivatives (options and futures) in various ways. Very complex payment term structures can now be incorporated into standardized contracts and traded at low transaction costs, due to computer analysis of these complex term structures.” Many of Szab's predictions have come true in ways that predate blockchain technology. For example, derivatives trading is now mostly conducted over computer networks using a complex futures structure.