The pioneering work of smart contracts: "Smart Contracts" - Nick Szabo

Translator (UncleDoge) Note: The concept of "smart contract" was proposed by computer scientist and cryptography master Nick Szabo around 1993. In 1994, he wrote the paper "Smart Contracts", which is the pioneering work of smart contracts. Nick Szabo is very famous for his research in the field of digital contracts and digital currencies. He created the term "smart contracts" and related concepts. Smart contracts are a major function of cryptocurrency and E programming language. As early as 1998, Nick Szabo designed a decentralized digital currency mechanism called "bit gold". Due to the lack of widespread support, it failed in the end, but it is recognized as the most direct forerunner of Bitcoin. Nick Szabo is often suspected of being the mysterious inventor behind Bitcoin - Satoshi Nakamoto.

A smart contract is a computerized transaction protocol that is used to enforce the terms of a contract. Smart contracts are typically designed to satisfy common contractual conditions (such as payment terms, garnishment orders, privacy, and even enforcement), minimize malicious and accidental situations, and minimize the use of trusted intermediaries. Related economic goals include reducing fraud losses, arbitration and enforcement costs, and other transaction costs ^[1] .

Some technologies that already exist today can be considered crude smart contracts, for example, point-of-sale (POS) machines and cards, electronic data interchange (EDI), and the allocation of supply and demand for public network bandwidth.

数字现金协议^[2] are good examples of smart contracts. They enable online payments while retaining the same characteristics of paper cash: unforgeability, privacy, and divisibility. When we take a closer look at the family of digital cash protocols and place them in the larger context of smart contract design, we can see that these protocols can be implemented for a wide variety of electronic bearer instruments, not just digital cash. We can also see their application to a complete customer-supplier transaction system. We need more than just digital cash protocols; we need protocols that can fully guarantee that if payment is made, the goods will be shipped, or that if goods are shipped, the money will be received. Current commercial systems use a variety of techniques to accomplish this, such as email confirmations, face-to-face transactions, and credit extensions based on credit histories and debt collection agencies. Smart contracts have the potential to significantly reduce the costs of fraud and enforcement in many commercial transactions. Digital cash protocols use several important foundational techniques from recent developments in cryptography and computer science. Most of these techniques have not yet been widely used to facilitate these contractual arrangements, but the promise is great. These sub-protocol families include Byzantine agreement, symmetric and asymmetric encryption, digital signatures, blind signatures, cut & choose, bit commitment, multiparty secure computations, secret sharing, oblivious transfer, and multiparty secure computation. All of these protocols except the first are described in ^[3] .

The consequences of smart contract design for contract law, economics, and contract drafting strategies (and vice versa) have rarely been explored. Beyond this, I suspect that the potential for significantly reducing the transaction costs of enforcing certain contracts and the opportunities for creating new business and social institutions based on smart contracts, while enormous, are also rarely explored. “Cypherpunks” ^[4] explored the political implications of some new building blocks of protocol. In the area of ​​Electronic Data Interchange (EDI), the electronic exchange of traditional business transaction elements (invoices, receipts, etc.), sometimes with encryption and digital signatures, can be seen as early precursors to smart contracts. Indeed, these business models provide good starting points and avenues for smart contract designers.

One of the important tasks of smart contracts that is neglected by traditional electronic data interchange (EDI) is to communicate the semantics of the transaction between the parties. Smart contracts have ample opportunities for "smart reservations": Software can manipulate one party to a transaction. For example, grocery store point-of-sale machines do not tell customers whether their names are tied to their purchases in the database. The clerks do not even know that they are processing thousands of such transactions under their noses. As a result, through hidden software operations, customers are giving away valuable and private information about themselves. But the contract has been drafted, and the transaction itself has been designed, in such a way that important parts of the transaction are hidden from the customer.

To communicate the semantics of transactions better, we need some common visual metaphors to explain the elements of the contract. These measures will result in hiding the details of the agreement, but without losing control over the understanding and execution of the contract terms. An early but good example is the functionality provided by the SecureMosaic software developed by CommerceNet (a B2B non-profit organization). Put a document in an envelope and digitally sign the document or envelope with a seal, and it is encrypted. On the other hand, the Mosaic server records these contacts and sometimes even the transactions themselves without alerting the user - typical hidden behavior.

Another area where smart contracts are being considered is合成型资产^[5] . These new types of securities are a mix of asset-backed securities (such as bonds) and derivatives (options and futures) in various ways. By applying computational analysis to these complex term structures, very complex term structures (such as payment timing, interest rates, etc.) can now be built into standardized contracts and traded at low cost.

Synthetic assets allow us to arbitrage the various term structures required by different customers, and also allow us to design contracts that mimic other contracts and reduce certain liabilities. In the latter case, the synthetic asset is structured to mimic the yield of German company stocks, without having to pay taxes to the German government on capital gains on German stocks by foreign investors. It is important to note that these synthetic assets do not require the negotiation of voting rights as the original ones do. Of course, these agreements may have to be very secure against attacks from third-party jurisdictions, and the costs (taxes) of trading in these third-party jurisdictions are arbitraged away through the synthetic asset.

Finally, we extend the concept of smart contracts to property.智能财产can be created by embedding smart contracts into tangible objects. These embedded protocols automatically transfer control of the keys to the property to the property's legitimate agent based on the terms of the contract. For example, a car could be prevented from being stolen by not being activated unless the owner completes a challenge-response protocol. If the car was purchased with a loan and the owner cannot repay the loan, the smart contract would automatically invoke a lien order and give control of the car keys to the bank. This smart lien should be cheaper and more efficient than a repo. Also needed is a protocol that provably removes the lien when the loan is paid off, and eliminates some difficult and operational situations. For example, it would be rude to disengage the car while it is running at 75 mph on the highway.

Smart property may be a long way off, but digital cash and synthetic assets are already here today, and more smart contract mechanisms are being designed. So far, design disciplines for automated contract execution that come from very different fields like economics and cryptography have been lacking in cross-communication: a lack of awareness of the technology on one side and a lack of awareness of the best business uses on the other. The idea of ​​smart contracts is to recognize that efforts toward a common goal will converge on the concept of smart contracts.

Reprinted from Nick Szabo's Collected Papers
Translator: UncleDoge
Editor: Meng Dada