One of the first applications that come to mind when blockchain is mentioned is undoubtedly "smart contracts". Generally, all legal experts, other social scientists, and people who focus on the technical side prefer the term: "smart contract", which refers to computer programs installed and/or executed on the blockchain. So, where did this concept come from, and how did it evolve; let's take a closer look:
The notion of smart contracts is actually the concept introduced by Nick Szabo in a series of articles in the early 1990s. Nick Szabo uses the following expressions in one of his articles: “New institutions, and new ways to formalize the relationships that make up these institutions, are now made possible by the digital revolution. I call these new contracts “smart” because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied. A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises”. Credit cards and electronic data interchange (EDI) with POS terminals we frequently use today can be considered a more primitive version of smart contracts.
At the incipit of his report after the creation of the Ethereum blockchain, Nick Szabo, stated that the blockchain is the jet fuel needed for building a smart contract. Thus, we began to witness the renaissance of smart contracts. While there are multiple blockchains that support smart contracts, the greatest of these is the Ethereum blockchain.
When we look at the Ethereum website, we see the following statements: “Smart contracts are the fundamental building blocks of Ethereum applications. They are computer programs stored on the blockchain that allow converting traditional contracts into digital parallels. Smart contracts are very logical - following an if this then that structure. This means they behave exactly as programmed and cannot be changed”.
Many people explain the working principle of smart contracts by using goods-vending machines. Predetermined conditions are included in Vending machines: the price of the good or service offered, the product/service number, etc. When the predetermined conditions are fulfilled, the machine automatically delivers the goods or provides the service (if… then/if this… then that). Actually, the key word here is automation.
The biggest advantage of vending machines is that while they reduce the transaction cost on the one hand, on the other hand, they eliminate the need for intermediaries. However, such vending machines also have some disadvantages. For example, the glass of these vending machines may be broken, the machine may be broken, and the people who place the goods in the machine may exhibit malicious behavior. Vending machines can also be affected by power cuts. All these possibilities may prevent goods-vending machines from always either working as expected or hoped or the planned result was achieved.
Smart contracts built on the blockchain go a few steps beyond vending machines, eliminating such risks. The terms of smart contracts are formulated in a machine-readable programming language. Since the need for intermediaries is eliminated, the risk of automation being disrupted by these people is also eliminated. Smart contracts are closed to external effects.
Since smart contracts are built on the blockchain, they contain all the features of the blockchain: processes secured by cryptography, transparency, elimination of intermediaries, no subsequent changes in transactions… All this means the execution of the smart contract cannot be prevented voluntarily by the will of the parties, by the blockchain operator that creates, operates, and controls the blockchain, or through the court. Since smart contracts are automatically implemented, even the judicial authorities cannot interfere and prevent the execution of the smart contract. Once the smart contract is deployed on the blockchain, it cannot be changed or canceled.
When the predetermined and coded conditions in the smart contract are met, the smart contract automatically executes the pre-decided matters by the parties without the necessity of them to take any further action. The smart contract code automatically supervises whether the predetermined conditions are met. If it has been detected that these conditions are met, the smart contract automatically exchanges the asset value among the parties. These features of smart contracts distinguish them from electronic contracts and take them to a new dimension.