Smart Contracts

Smart contracts are software protocols that automatically enforce the terms agreed upon by parties in a contract on a decentralized digital infrastructure. Unlike traditional contracts, these systems operate without the need for a third party side such as an arbitrator or intermediary. Smart contracts are primarily executed on blockchain technology and automatically trigger actions when predefined conditions are met.

The reason these contracts are termed “smart” is their ability to execute transactions without human intervention. However, the term “smart” does not imply that they are endowed with artificial intelligence or system. These contracts monitor whether specific conditions have been met and trigger preprogrammed actions accordingly. Written in code, these contracts can operate under conditions such as: “If person A pays person B by a specified date, access to the digital product owned by person C is granted.” like Once the conditions are fulfilled, the transaction is executed irreversibly.

History

The concept of smart contracts was first introduced in 1994 by lawyer and computer scientist Nick Szabo. Szabo defined the concept as the digitization of traditional contracts to make them more secure and efficient. However, the system proposed by Szabo could not be implemented due to the insufficient technological infrastructure of the time.

The emergence of Bitcoin in 2009 demonstrated the viability of blockchain technology and paved the way for the practical application of smart contracts. However, since Bitcoin’s programmability was limited, the development of smart contracts truly began with the launch of the Ethereum platform in 2015. Ethereum enabled developers to write their own smart contracts through a Turing-complete virtual machine (Ethereum Virtual Machine – EVM). This advancement led to increased adoption of smart contracts across various industries.

Technical Infrastructure

Smart contracts primarily operate on blockchain platforms such as Ethereum. Ethereum provides an infrastructure that executes contracts written in a specialized programming language called Solidity. These contracts run on the Ethereum Virtual Machine (EVM) and are executed in a decentralized manner.

The fundamental properties of blockchain—immutability and decentralized building—enhance the security of smart contracts. Once a transaction is added to the chain, it becomes irreversible and visible to all participants. Additionally, transaction fees known as “gas fees” prevent abuse of the network.

The core logic of smart contracts is based on an “if-then” structure that checks whether specific conditions are met and then automatically executes a pre-determined action. For example, payment can be automatically triggered once delivery of a product is confirmed.

Applications

Smart contracts are used across a wide range of industries and applications. They hold significant potential to automate processes, enhance security, and reduce costs. Below are some key application areas:

Finance

Smart contracts enable secure and automated execution of financial transactions, particularly prevalent in decentralized finance (DeFi) platforms.

• Automated loan repayments: Smart contracts automate loan repayments. When certain conditions are met (e.g., the borrower makes a payment), the payment is processed automatically, eliminating the need for ongoing borrower monitoring.
• Debt and receivables management: When a debt is incurred, payment terms are tracked via a smart contract, and payments are made automatically when due. This prevents late payments and increases trust between parties.

Insurance

In the insurance industry, smart contracts can automate claims payouts. When integrated with black box technology, damage events can be accurately verified, enabling insurers to issue payouts instantly.

• For example, a weather insurance policy: If a specified weather event (e.g., a severe storm) occurs in a designated area, the insurer automatically makes a payment.
• Health insurance: A patient’s medical expenses can be automatically paid through a designated provider.

Real Estate

The real estate sector can leverage smart contracts to accelerate property purchases, sales, and rental processes.

• Property title transfers: In property transactions, title transfers can be conducted securely and swiftly through smart contracts, eliminating the need for intermediaries.
• Rental agreements: Smart contracts can automatically initiate the rental process and disburse payments to the property owner upon receipt of payment from the tenant.

Logistics

Smart contracts offer significant benefits in supply chain and logistics sectors, particularly by automating product transportation and delivery processes.

• Product delivery and payment: When a product reaches its designated destination, payment can be automatically triggered. This enhances security, especially in trade and import-export industries.
• Inventory management: Every step in the supply chain can be tracked, and items running low in inventory can be automatically reordered.

Copyright and Digital Content

Smart contracts can be used by digital content creators to protect their copyrights and ensure consistent revenue streams.

• Digital content ownership: For instance, when an artist shares a song or video online, smart contracts can automatically distribute royalty payments each time the content is used.
• Revenue sharing via smart contracts: Revenue sharing between content creators and platforms can be managed accurately and fairly through contractual automation.

Advantages

Security

Smart contracts offer high security through the immutability provided by blockchain technology. Every transaction on the blockchain is verified by the network and recorded transparently, making it nearly impossible to alter or manipulate the contract’s content.

Transparency

All transactions are visible and verifiable by anyone. This fosters trust among parties, as operations occur transparently and all participants are fully aware of the contract’s terms. In case of disputes, the complete transaction history can be referenced to reach a decision.

Speed and Efficiency

One of the most significant advantages of smart contracts is their automated execution. By eliminating intermediaries and manual approvals, smart contracts enable transactions to occur much more rapid and efficiently. This is especially advantageous in time-sensitive areas such as financial transactions and supply chain management.

Lower Costs

Traditional contracts typically involve third parties such as lawyers, notaries, or brokerage firms. Smart contracts eliminate these intermediaries, significantly reducing transaction costs. Additionally, decentralized systems enable transactions to be conducted at lower costs.

Reduced Errors

Smart contracts operate based on predefined conditions, minimizing human error. Issues such as typographical mistakes, ambiguous interpretations, or misunderstandings that occur in manual processes do not arise in this system.

Disadvantages

Code Errors

As software, smart contracts can contain coding errors and security vulnerabilities. Such flaws may lead to incorrect transactions or financial losses. Detecting errors in complex smart contracts can be difficult, and if a mistake occurs, the transaction cannot be reversed.

Lack of Flexibility

Smart contracts operate strictly based on predefined conditions and cannot perform any action outside those specified in the code. This can create problems under uncertain or changing circumstances. For example, if contractual terms need to be modified due to unforeseen events, the contract must be rewritten.

Legal Uncertainty

The validity of smart contracts is subject to debate in some countries. Many legal systems do not recognize smart contracts as legally binding yet complete. Regulatory frameworks may create uncertainty regarding contract validity and enforceability. Additionally, legal issues arising from errors in smart contracts remain unresolved.

Irreversibility

Another disadvantage of smart contracts is their irreversibility once a transaction is executed. This increases the risk of errors, as a mistaken transaction cannot be undone or corrected.

Future Perspective

Smart contracts are expected to become more advanced and powerful in the future. State institutions, banks, and multinational corporations are currently testing or using this technology. They are likely to play a larger role in areas such as decentralized finance (DeFi), decentralized identity verification, and digital citizenship. Moreover, new applications such as “AI-powered smart contracts” are being developed, combining smart contracts with artificial intelligence to analyze more complex scenarios. These developments may necessitate the reformation of legal and ethical regulations.