The concept of smart contracts was first conceived by researcher Nick Szabo in the mid 1990s. In his papers, he described smart contracts as a set of promises, specified in digital form, including protocols within which the parties perform these promises. This description can be broken into four pieces:
- A set of promises
- Digital form
- Protocols for communication and performance
- Performance of actions triggered automatically
As you can see, nowhere in this is the blockchain directly specified, as blockchain technology had not yet been invented and would not be invented for another 13 years. However, with the invention of blockchain technology, smart contracts were suddenly much more achievable.
Smart contracts and blockchain technology are independent ideas. A blockchain can exist without smart contracts (Bitcoin, for instance, has no real smart contract ability built in), and smart contracts can be built without a blockchain. However, blockchain is a technology particularly well-suited for the development of smart contracts because it allows trustless, decentralized exchange. Essentially, the blockchain provides two out of the four necessary items for smart contracts: digital form and protocols for the communication and performance of actions between distinct parties.
In this chapter, we will go over some of the different blockchain networks and their approaches to smart contract technology. In this chapter, we will cover the following topics:
- Why use smart contracts?
- Approaches to smart contracts
- Limitations of smart contracts
In general, the various smart contract approaches can be divided into different types: Turing Complete, Restricted Instructions, Off-Chain Execution, and On-Chain Execution, as shown in the following figure:
The types of smart contracts that are executed on a system determine performance, what can and cannot be executed on the system, the complexity, and of course, the level of security.
Before we go further, let's discuss why smart contracts are desired and even revolutionary.