Smart contracts, also known as intelligent contracts, are digital agreements that facilitate various types of transactions. They are increasingly gaining prominence in the legal field. Fueled by the exponential rise of blockchain technology, they have become indispensable in recent years.
What are smart contracts? Who invented them and why? Find out in this article.
Smart Contracts Explained
A smart contract, or intelligent contract, is a decentralized application that automates and autonomously executes online agreements.
Its uses allow different parties to exchange money, goods, or shares autonomously and securely on a public network. Its key feature? A smart contract can be executed without the need for third parties such as a notary or a lawyer.
To better understand, here is a very simplified example from everyday life: Jérôme wants to buy a house from Camille. An agreement between the two parties exists on the blockchain. Jérôme must pay 200 ETH (Ethereum, the main associated currency) in exchange for Camille’s house. Once these 200 ETH are transferred to Camille, Jérôme will not have to pay anything more. In real life, he would have had to cover several additional costs, such as notary or real estate agent fees. The transaction could also have taken several months to complete.
By using a smart contract, traditional contracts and all their associated constraints are eliminated, eliminating the need for delays and intermediaries. Smart contracts offer three notable advantages over traditional contracts, allowing in particular to:
These advantages do not only appeal to individuals seeking investments. Smart contracts are increasingly used in sectors such as finance, LegalTech, insurance, supply chain management, healthcare, and business services to facilitate exchanges and processes.
Who is the inventor of smart contracts?
The invention of smart contracts is credited to Nick Szabo, an early credit for the idea. If you are a cryptocurrency enthusiast, this name might sound familiar, as he is one of the pioneers of digital currencies. In 1994, this American computer scientist, born in Hungary, published an article on his blog where he introduced the concept. He shared his vision of smart contracts and was the first to use this term.
According to him, these digital contracts provide real added value to all stakeholders, and their use would help reduce transactional risks while minimizing human constraints.
After two years of research, he presented a new perspective on the subject and shared a mapping of smart contracts, demonstrating their usefulness and implementation in everyday life. Nick Szabo confirmed that this type of contract is both reliable and understandable, without ever compromising the protocol applied to conventional contracts.
He then decided to return to school to pursue legal studies. This new skillset allowed him to gain a comprehensive perspective on the legal framework surrounding contracts.
Fun fact: Some suspect Nick Szabo of being Satoshi Nakamoto, the inventor of Bitcoin.
Smart contracts: Programs that write themselves?
As its name suggests, a smart contract operates intelligently. However, be careful not to misunderstand: this type of contract does not write itself. Instead, it executes autonomously. So, what does that actually mean?
Smart contracts are shaped by experienced developers, not conventional lawyers. As a result, they require a high level of detail in their code, which must follow a meticulous structure based on conditions. These are often created using programming languages like Solidity, the most popular language for Ethereum smart contracts.
While a traditional contract is rooted in a legal framework, this is not the case for a smart contract, which relies on computer code and has no constitutional authority.
Thus, to ensure their reliability, each asset and term of the protocol is carefully encrypted. Multiple conditions are integrated, and they must be met in order for the transaction to be validated.
Which means that:
- If all the conditions specified in the contract are met, the smart contract executes, in accordance with the pre-established terms.
- However, if any failure to meet the requirements is detected, the operation is invalidated. In any case, each piece of code is carefully stored in a blockchain block, along with all the related transactions. This ensures infallible traceability of all operations.
Smart contracts and blockchain, why are they so closely linked?
Blockchain, also known as a distributed ledger or chain of blocks, is a technology that ensures the sharing of information and secure storage of data online. Transparent and decentralized, it operates independently.
Smart contracts are dependent on blockchain because they need it to function. Once a digital contract is published, its pre-established instructions are executed automatically and securely thanks to blockchain. The reliability of blockchain technology makes the protocol linked to the smart contract immutable, and forgery is unimaginable.
During the execution of the application, each operation is stored on one block, then another. This provides traceability for all validation steps, without exception, even if the information is subject to change.
Among the blockchain technologies that exist and host smart contracts, Ethereum blockchain stands out as the most popular, as mentioned earlier. It runs on the Ethereum Virtual Machine, which ensures contracts operate securely and consistently across the network.
However, Ethereum is far from the only one, as smart contracts can also be deployed on other technologies such as Tezos, EOS, or Cosmos. These contracts can automate complex processes across web-based platforms, making them highly valuable in the digital world.
Given the speed at which these technologies, especially smart contracts, are becoming more widespread, it is estimated that their share of the global market will be worth at least 345 billion dollars by 2027.
Why Smart Contracts Matter Now
Given the speed at which technologies as smart contracts are becoming more widespread, it is estimated that their share of the global market will be worth at least 345 billion dollars by 2027.
Industries across finance, real estate, insurance, healthcare, logistics, and government now use smart contracts to create applications that streamline operations, reduce costs, eliminate middlemen, and increase transparency. A smart contract can manage payments, enforce terms, and securely store and transfer assets within large systems like platforms or networks.
Smart contracts are already shaping how we interact with decentralized finance, digital services, and even everyday web applications. As the technology matures, more people are learning how to use it to improve trust, efficiency, and control without relying on traditional intermediaries.
