From the Garage
Smart contracts
A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible.
Proponents of smart contracts claim that many kinds of contractual clauses may be made partially or fully self-executing, self-enforcing, or both. The aim of smart contracts is to provide security that is superior to traditional contract law and to reduce other transaction costs associated with contracting. Various cryptocurrencies have implemented types of smart contracts.
History
Smart contracts were first proposed in the early 1990’s by computer scientist, lawyer and cryptographer Nick Szabo, who coined the term. With the present implementations, based on blockchains, "smart contract" is mostly used more specifically in the sense of general purpose computation that takes place on a blockchain or distributed ledger. In this interpretation, used for example by the Ethereum Foundation or IBM, a smart contract is not necessarily related to the classical concept of a contract, but can be any kind of computer program.
A smart contract also can be regarded as a secured stored procedure as its execution and codified effects like the transfer of some value between parties are strictly enforced and can not be manipulated, after a transaction with specific contract details is stored into a blockchain or distributed ledger. That's because the actual execution of contracts is controlled and audited by the platform, not by any arbitrary server-side programs connecting to the platform.
In 2018, a US Senate report said: "While smart contracts might sound new, the concept is rooted in basic contract law. Usually, the judicial system adjudicates contractual disputes and enforces terms, but it is also common to have another arbitration method, especially for international transactions. With smart contracts, a program enforces the contract built into the code."
By implementing the Decree on Development of Digital Economy, Belarus has become the first-ever country to legalize smart contracts. Belarusian lawyer Denis Aleinikov is considered to be the author of a smart contract legal concept introduced by the decree.
Implementations
Byzantine fault-tolerant algorithms allowed digital security through decentralization to form smart contracts. Additionally, the programming languages with various degrees of Turing-completeness as a built-in feature of some blockchains make the creation of custom sophisticated logic possible.
Notable examples of implementation of smart contracts include the following:
- Bitcoin provides a Turing-incomplete Script language that allows the creation of custom smart contracts on top of Bitcoin like multisignature accounts, payment channels, escrows, time locks, atomic cross-chain trading, oracles, or multi-party lottery with no operator.
- Ethereum implements a nearly Turing-complete language on its blockchain, a prominent smart contract framework.
- Ripple (Codius), smart contract development halted in 2015
Replicated titles and contract execution
Szabo proposes that smart contract infrastructure can be implemented by replicated asset registries and contract execution using cryptographic hash chains and Byzantine fault-tolerant replication. Askemos implemented this approach in 2002 using Scheme (later adding SQLite) as contract script language.
One proposal for using bitcoin for replicated asset registration and contract execution is called "colored coins". Replicated titles for potentially arbitrary forms of property, along with replicated contract execution, are implemented in different projects.
As of 2015, UBS was experimenting with "smart bonds" that use the bitcoin blockchain in which payment streams could hypothetically be fully automated, creating a self-paying instrument.
Security issues
A smart contract is "a computerized transaction protocol that executes the terms of a contract". A blockchain-based smart contract is visible to all users of said blockchain. However, this leads to a situation where bugs, including security holes, are visible to all yet may not be quickly fixed.
Such an attack, difficult to fix quickly, was successfully executed on The DAO in June 2016, draining US$50 million in Ether while developers attempted to come to a solution that would gain consensus. The DAO program had a time delay in place before the hacker could remove the funds; a hard fork of the Ethereum software was done to claw back the funds from the attacker before the time limit expired.
Issues in Ethereum smart contracts, in particular, include ambiguities and easy-but-insecure constructs in its contract language Solidity, compiler bugs, Ethereum Virtual Machine bugs, attacks on the blockchain network, the immutability of bugs and that there is no central source documenting known vulnerabilities, attacks and problematic constructs.
Distributed ledger
A distributed ledger (also called a shared ledger or distributed ledger technology or DLT) is a consensus of replicated, shared, and synchronized digital data geographically spread across multiple sites, countries, or institutions. There is no central administrator or centralized data storage.
A peer-to-peer network is required as well as consensus algorithms to ensure replication across nodes is undertaken. One form of distributed ledger design is the blockchain system, which can be either public or private.
Distributed Ledger
The distributed ledger database is spread across several nodes (devices) on a peer-to-peer network, where each replicates and saves an identical copy of the ledger and updates itself independently. The primary advantage is the lack of central authority. When a ledger update happens, each node constructs the new transaction, and then the nodes vote by consensus algorithm on which copy is correct. Once a consensus has been determined, all the other nodes update themselves with the new, correct copy of the ledger. Security is accomplished through cryptographic keys and signatures.
Applications
In 2016, some banks tested distributed ledgers for payments to see if investing in distributed ledgers is supported by their usefulness.
Types
Distributed ledgers may be permissioned or permissionless. This determines if anyone or only approved people can run a node to validate transactions. They also vary between the consensus algorithm. (Proof of work, Proof of Stake, or Voting systems). They may be mineable (you can claim ownership of new coins contributing with a node) or not mineable (the creator of the cryptocurrency owns all at the beginning).