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Smart Contracts Described by Nick Szabo 20 Years Ago Now Becoming Reality

Smart contract technology is booming with the release of Ethereum and programming languages such as Solidity and Serpent, that have made contracts much simpler to build and deploy. The idea has been around for a long time, though. Nick Szabo, the cryptographer known for his research on digital currency, wrote an article about smart contracts as early as 1995. Szabo’s article, “Smart Contracts,” was published in early 1996 in the magazine Extropy, and forecast with prescient accuracy the benefits and parameters of the blockchain contract applications in development and making blockchain news headlines today.

Szabo defined a contract as being “a set of promises agreed to in a meeting of the minds [which] is the traditional way to formalize a relationship.” Such contracts are a pillar of a free market economy and can be useful in business relationships, marriages and politics. 

In his 1995 article, Szabo predicted that the digital revolution would drastically change the way humans make contracts, and he questioned even then whether our traditional contracts would continue to have a use in the cyberspace era. 

Szabo saw early on that computers were making it possible to run algorithms that used to be too costly, and believed algorithms eventually would be developed for what he termed “smart contracts.” He defined this as “a set of promises, specified in digital form, including protocols within which the parties perform on the other promises” without the use of artificial intelligence. 

Smart contracts would improve execution of the four basic contract objectives, which Szabo described as observability, verifiability, privity and enforceability. Among other use cases discussed in the following sections, smart contracts according to Szabo would enable both parties to observe the other’s performance of the contract, verify if and when a contract has been performed, guarantee that only the details necessary for completion of the contract are revealed to both parties and be self-enforcing to eliminate the time spent policing the contract. 

Multinational Small Business

In the 1995 marketplace, multinational businesses, rather than local ones, conducted the majority of international commerce. Szabo predicted that in a future marketplace there would be such a thing as a small and multinational business, similar in size to a local business in 1995. He believed the change could happen as quickly as the telecom boom. 

For local businesses in 1995, communication and transport costs had become extremely low with the advent of technological innovations such as fiber optic cables. Still, legal issues created a barrier for local businesses who wanted to enter the global playing field. Szabo predicted in his article that smart contracts would overcome that barrier, drastically lowering legal costs along with the requirement of compliance with every local legal code and regulation.

Virtual Personas

Szabo also suggested that people might create different virtual personas to cater to different parts of one’s personality or lifestyle. One might have a persona for work life, for family life, for friends and many more. Each persona could be unique and only share data that the person felt comfortable sharing in that part of his or her life. 

Szabo defined a “nym” as “an identifier that links only a small amount of related information about a person, usually that information deemed by the nym holder to be relevant to a particular organization or community.” Nyms can include nicknames, brand names or aliases. A nym can have built-in equity from the positive associations of other nyms with a similar name or from a reputable person or group of people. 

Szabo defined a true name as “an identifier that links many different kinds of information about a person, such as their birth name or Social Security number.” Szabo predicted that knowing the true name of someone could provide massive economic value to a person(s); one example he cited was allowing an organization to send targeted product information, knowing the person is interested.

A goal for everyone in the virtual world would be to create a “reputable name,” which would be a nym or a true name that carries positive attributes and is highly regarded. Szabo predicted that one day people would sell virtual personas, similar to the way that companies sell brand names. 

Smart Property

With an increase in the use of smart contracts, Szabo believed we would begin to embed smart contracts into our physical property, which he described as “smart property.” These embedded smart contracts would automatically grant access to the rightful owner of the property or guests, depending on the parameters of the contract. 

Szabo provided the example of a leased car, whose embedded contract could automatically return control of the car to the loaner if the lessee failed to make payments on time. In this way, smart property would provide value only to the real owner, and could eliminate the possibility of theft. 

Visual Smart Contract Representation

With smart contracts, communicating the exact terms of an agreement with all parties involved is necessary. Fine print or misrepresented information is a huge problem with traditional contracts, whereas smart contracts can have “fine print” written into the code that is hidden from one of several of the parties in a transaction. For example, a POS system at a grocery store, a basic version of a smart contract, can collect data about the customer, such as their name, and store it in a database without the customer knowing. 

Szabo’s solution for mainstream useability was that smart contracts should integrate a visual representation for the elements of a transaction. This would allow parties to not rely exclusively on looking at code to agree on the semantics of a contract and would eliminate any risk of hidden actions present in the code.

Szabo’s vision as articulated in 1995--the equivalent of light years ago in digital time--was remarkably accurate and has established a template that, while many at the time may have doubted, no one can now deny is becoming a reality.

Michael Gord

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