This may be one of the most obvious statements that you’ll read today, but contracts aren’t easy. For something that is specifically designed to facilitate trust, understanding, and cooperation, they often don’t. According to a study involving 26 US states, 47% of all civil cases are contract related – meaning that at least one party in a contract is accused of not fulfilling their obligation. Beyond this, far from being a simple agreement, contracts often involve a bevy of middlemen, such as lawyers, notaries, or any other intermediaries, all of which increase costs for all involved parties. In other words, there’s a reason why contract law has been such a lucrative and expansive area of the legal profession; however, it doesn’t need to be this way, and, thanks to today’s term, smart contract, things may be changing.
Defined as a computer program which is automatically able to execute the code-written terms of a contract based on criteria agreed upon by all involved parties, out term is the combination of smart and contract. Though the initial use of smart- from the Proto-Germanic smarta and the Old English smeortan– actually involved the sensation of pain, as can be seen in Arthur Napier’s 1883 translation of Wulfstan, where the phrase in the Old English Homily Sermo ad Populum Dominicis Diebus, “Ic wylle swingan eow mid þam smeartestum swipum” roughly translates to “I intend to strike/whip you with a smart swipe,” our machine-based application of the term to indicate a certain level of intelligence or response in a specific situation can be traced back to the 21 August 1948 edition of the Science News magazine, which writes: “The earlier eniac was pretty smart but the univac is even smarter.” As for contract, whose first use can be traced back to Geoffrey Chaucer’s Friar’s Tale, writing circa 1386 that: “Of robbing churches, and of wills, of marriage contracts and of failure to take the sacraments,” the term has always been about a mutual agreement between parties, stemming from the Old French contract and, originally, from the Latin contrahere, literally meaning ‘to draw together.’
While we’re typically accustomed to the concept of smart contracts in relation to blockchain technology, the term itself is about a decade older. Originally mentioned by lawyer and cryptographer Nick Szabo in an early 1996 article entitled “Smart Contracts” in the magazine Extropy, where the author outlines how the then-oncoming digital revolution would provide a better way to achieve the 4 key objectives of a contract: observability, verifiability, privity and enforceability.
Applied to something we’re all familiar with, one of the best ways to understand this concept is through using a vending machine:
1. It is an understanding between us and the company, no intermediaries.
2. We (and the vendor) don’t need to trust each other, just trust the machine.
3. Once we decide what we want, we insert the necessary money, and the machine releases the vendor’s product.
If this sounds simplistic, that’s because – by operating via a basic if/then statement – it is; however, along with simplicity, smart contracts also afford greater transparency, security, and privacy without having to involve outside parties in contracts. Considering that this technology has already had a substantial impact on the financial world, the full impact outside of it remains to be seen, especially when we begin to realize just how many aspect of our daily lives revolve around the if/then statements of smart contracts.