A Short History of Smart Contracts

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  • Smart contracts have underpinned the decentralized world, enabling the creation of decentralized exchanges and NFTs
  • They could potentially serve billions of people worldwide in executing financial transactions if DeFi takes off
  • Smart contracts date back to the 1990s and have finally seen fruition

Smart contracts underpin the entire decentralized world and are the bricks and mortar that allow developers to build everything from decentralized exchanges to NFTs. If the world of DeFi makes it into the mainstream, they will be used by billions of people all over the world to execute everyday financial transactions. But what are smart contracts and where did they come from? Let’s find out.

Thirty Years and Counting

The concept of smart contracts dates back to the 1990s when computer scientist, cryptographer, and Satoshi Nakamoto candidate Nick Szabo introduced the idea. He defined a smart contract as a computerized transaction protocol that executes the terms of a contract, with the goal being to reduce the need for trusted intermediaries, minimize fraud loss, and reduce enforcement costs.

Essentially, smart contracts are like digital agreements that automatically execute when certain conditions are met. Imagine a vending machine: you put in money, and it automatically gives you a snack without needing a person to complete the transaction. Smart contracts work similarly but for more complex tasks and agreements, using blockchain technology to ensure security and transparency. Examples include:

  • Insurance Claims: Automatically pay out claims when conditions are met (e.g., flight delays).
  • Real Estate: Automate property transfers once payment is made.
  • Supply Chain: Track goods and release payments upon delivery confirmation.
  • Voting Systems: Secure and transparent vote counting.
  • Digital Rights: Automate royalty payments to artists when their music is streamed.

These contracts remove the need for intermediaries, reduce costs, and increase trust and efficiency in various transactions.

With the advent of blockchain technology, smart contracts gained practical implementation, most notably with the launch of Ethereum in 2015. Ethereum’s blockchain allows developers to deploy decentralized applications (DApps) using smart contracts, automating various types of transactions and agreements.

Scaling Will Help Adoption

Smart contracts are already used in various industries, including finance, supply chain, and real estate, providing transparent, secure, and automated contract execution. The technology continues to evolve, with ongoing research and development aimed at enhancing their efficiency, scalability, and security.

Of course, blockchains will have to evolve with such growth, but this is already happening with the various Ethereum sidechains in developments, not to mention Ethereum’s own scaling plans, plus competitors such as Avalanche and Binance Smart Chain.