Smart Contracts: A Brief History

Birth of the Smart Contract

In 1996, Google was a year away from launching, users accessed the Internet through dial-up modems, and a computer scientist named Nick Szabo published a paper speculating that one day software would be used to create “smart contracts” that administered themselves¹.

Mid-90s Cell phones could be used as a weapon in a pinch.

Many kinds of contractual clauses (such as liens, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with, in such a way as to make breach of contract expensive (if desired, sometimes prohibitively so) for the breacher. Smart Contracts: Building Blocks for Digital Markets. Nick Szabo

In his paper, Mr. Szabo cited vending machines as a “primitive ancestor of smart contracts” since they receive payment and distribute goods without third party intervention. He hypothesized that improvements in computer hardware and software would allow smart contracts to handle more complex transactions for a variety of digitally controlled property interests. However, it would take more than a decade for technology to catch up with Mr. Szabo’s most basic ideas.

Photo by Claudio Schwarz on Unsplash

Bitcoin

In 2008, Apple launched their first iPhone, Google released the Chrome web browser, and Satoshi Nakamoto² proposed a digital currency called Bitcoin³. Bitcoin was not the first attempt to create a digital currency. But, it was the first cryptocurrency success because it allowed users to perform peer-to-peer transactions that were secured by a ledger hosted on a decentralized network of computers known as the blockchain. Instead of relying on third parties to authenticate transactions, Bitcoin utilized code hosted on the blockchain to autonomously manage asset transfers. Owing to the similarity between cryptocurrency transactions and the technology Mr. Szabo imagined in 1996³, the code snippets used to manage transfers within blockchain networks are commonly referred to as “smart contracts”.

In the decade following Bitcoin’s launch, the number of cryptocurrencies, blockchains, and smart contracts has ballooned. Yet, even with increased crypto adoption, Mr. Szabo’s vision for the future of contracts is far from being realized.

Photo by Pim Chu on Unsplash

Smart Contracts Today

In the 25 years since Mr. Szabo introduced the idea of a smart contracts, our phones have become more powerful and ubiquitous, social media and online shopping replaced search as the Internet’s premier attraction, and blockchain technology has achieved widespread acceptance. But though technological advancements and cultural shifts have increased users’ reliance on digital transactions, smart contracts continue to be employed as little more than digital vending machines used to swap blockchain assets.

The failure of smart contracts to keep pace with technological evolution is partially the result of the blockchain’s success. As adoption of a cryptocurrency expands, its value increases, and the cost of storing and accessing data on the related blockchain climbs. Thus, storing the substantial amount of data required to form a sophisticated contract on the blockchain is prohibitively expensive. While acceptance of crypto technology has impeded the usefulness of smart contracts, resistance of this technology has hindered their scope.

Governments been slow to incorporate blockchain into their record-keeping regulations which has significantly reduced the assets smart contracts are capable of controlling. The “liens, bonds, and property rights” Mr. Szabo envisioned smart contracts administering are all highly regulated security interests with strict formation and recordation procedures. Authorizing smart contracts to create and manage these security interests would require significant legislative and regulatory action, which has been difficult to enact due to the surging value and decentralized nature of cryptocurrencies.

By Jo Zimny Photos on Flickr

What’s Next

We are still a long way from smart contracts replacing traditional contract forms. However, there are many improvements to smart contracts that can be instituted today, that will expand their effective scope, reduce their cost, and spur government action by demonstrating the value added by incorporating blockchain technology into traditional contract law.

However, first we must solve a fundamental issue with smart contracts — in most cases, they do not meet the legal definition of a contracts

Pat is a lawyer with a passion for technology who spends his evenings as a hobby developer. None of the foregoing should be considered legal advice or opinion. Interacting with this material does not create an attorney-client relationship. These are personal thoughts I am sharing as I learn and develop blockchain applications. Thank you for reading.

1. Smart Contracts: Building Blocks for Digital Markets. Nick Szabo (1996). https://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart_contracts_2.html
2. If that is his real name…
3. Bitcoin: A Peer-to-Peer Electronic Cash System. Satoshi Nakamoto(2008). https://www.ussc.gov/sites/default/files/pdf/training/annual-national-training-seminar/2018/Emerging_Tech_Bitcoin_Crypto.pdf
4. And the widely-held belief that Nick Szabo is Satoshi Nakamoto.