A smart contract is a computer program or a transaction protocol that is intended to automatically execute, control or document events and actions according to the terms of a contract or an agreement. The objectives of smart contracts are the reduction of need for trusted intermediators, arbitration costs, and fraud losses, as well as the reduction of malicious and accidental exceptions. Smart contracts are commonly associated with cryptocurrencies, and the smart contracts introduced by Ethereum are generally considered a fundamental building block for decentralized finance (DeFi) and NFT applications.
Vending machines are mentioned as the oldest piece of technology equivalent to smart contract implementation. The original Ethereum white paper by Vitalik Buterin in 2014 describes the Bitcoin protocol as a weak version of the smart contract concept as originally defined by Nick Szabo, and proposed a stronger version based on the Solidity language, which is Turing complete. Since Bitcoin, various cryptocurrencies have supported programming languages which allow for more advanced smart contracts between untrusted parties.
A smart contract should not be confused with a smart legal contract, which refers to a traditional, natural-language, legally-binding agreement that has selected terms expressed and implemented in machine-readable code.
Smart contracts were first proposed in the early 1990s by Nick Szabo, who coined the term, using it to refer to "a set of promises, specified in digital form, including protocols within which the parties perform on these promises". In 1998, the term was used to describe objects in rights management service layer of the system The Stanford Infobus, which was a part of Stanford Digital Library Project.
A smart contract does not typically constitute a valid binding agreement at law, although a smart legal contract is intended to be both executable by a machine and legally enforceable.
Smart contracts are not legal agreements, but rather means of performing obligations deriving from agreements that can be executed automatically by a computer program or a transaction protocol, such as technological means for the automation of payment obligations or obligations consisting in the transfer of tokens or cryptocurrencies. Some scholars have argued that the imperative or declarative nature of programming languages would impact the legal validity of smart contracts.
Since the 2015 launch of the Ethereum blockchain, the term "smart contract" has been more specifically applied toward the notion of general purpose computation that takes place on a blockchain or distributed ledger. The US National Institute of Standards and Technology describes a "smart contract" as a "collection of code and data (sometimes referred to as functions and state) that is deployed using cryptographically signed transactions on the blockchain network". 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 value between parties) are strictly enforced and cannot be manipulated; after a transaction with specific contract details is stored into a blockchain or distributed ledger, it cannot be changed. That's because the actual execution of contracts is controlled and audited by the platform, not by arbitrary server-side programs connecting to the platform.
In 2017, 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.
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." A number of states in the US have passed legislation on the use of smart contracts, such as Arizona, Nevada, Tennessee, and Wyoming. And in April 2020, Iowa's House of Representatives passed a bill legally recognizing smart contracts in the state.
In April 2021, the UK Jurisdiction Taskforce (UKJT) published the Digital Dispute Resolution Rules (the Digital DR Rules) to help enable the rapid resolution of blockchain and crypto legal disputes in Britain.
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