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In 1996, the inventor of smart contracts, Nick Szabo, in his paper titled “Smart Contracts: Building Blocks for Digital Markets,” theorized about the importance of smart contracts “as the basic building block of a free market economy”. In the paper, he discussed how smart contracts could create new kinds of businesses and social institutions by significantly reducing transaction costs. Nick proposed the correct use of smart contracts could bring about a commercial and social revolution.
Fast forward to 2023, with the impending arrival of Web3, Nick Szabo’s vision of a digital market that operates using smart contracts and cryptographic assets is increasingly becoming a reality thanks to the technological wonders of blockchain.(2) Smart Contracts as Digital Vending Machines
Smart contracts facilitate the automated initiation, implementation, and enforcement of contractual obligations through the programming of these obligations in the codes of these contracts. Functionally, the idea of smart contracts is similar to the humble vending machine, but instead of dispensing Coke and Pepsi, these contracts dispense cryptocurrencies and non-fungible tokens (NFTs). In this regard, smart contracts are advanced digital vending machines that entail the key features of automation, decentralization, and being empirical.
Features of Smart Contracts (Source: Avocado DAO)(a) Automated
The automated feature of smart contracts means that their operations would not require the intervention of any intermediary. This dispensation of intermediation is because the process chains of smart contracts would automatically be initiated once the coded parameters have been fulfilled.
When the preset preconditions as programmed into the codes of a smart contract are fulfilled, the smart contract will initiate the relevant process chain through the use of self-executing codes, thereby eliminating the need for any intermediary. This dispensation of intermediation reduces or perhaps even eliminates the need of transaction costs, and lowers the risks of fraud and errors arising from the use of intermediaries.(b) Decentralized
The self-executing codes of smart contracts are stored on decentralized blockchain networks. The storage of their codes on blockchain networks renders these contracts autonomous, as they are beyond the control or influence of any single entity.
Not only that, the immutable and transparent nature of blockchain records helps warrant the accountability and integrity of the processes and transactions of smart contracts. From the perspective of technical application, the decentralized feature of smart contracts enables them to be the back-end mechanism that supports decentralized instruments and frameworks such as decentralized applications (dApps) and decentralized autonomous organizations (DAOs).(c) Empirical
The operations of smart contracts depend on reliable data feeds from oracles which are lines of codes that supply information to blockchain networks to inform the processes of these contracts. Concerning on-chain data, these data can be obtained directly from the blockchain networks to which a smart contract is connected. As for off-chain data, smart contracts rely on oracles, which source and verify external information.
A notable use case of on-chain and off-chain data of a blockchain-based smart contracts network is IBM's Hyperledger Fabric platform. The platform is designed in such a way that allows organizations to incorporate the use of blockchain as part of their operations through a range of enterprise use cases. In terms of on-chain data, Hyperledger Fabric allows its enterprise users to store information pertaining to their digital assets including transaction history on their blockchain network.
As for off-chain data, Hyperledger Fabric allows its enterprise users to store sensitive information such as those in relation to confidential transactions outside the platform's blockchain network. Although these information are off-chain, they can be retrieved by Hyperledger Fabric using rather complex mechanisms such as oracles, sidechains or state channels, whether by themselves or in combination. However as off-chain information is not stored on the platform's blockchain network, their credibility and integrity would have to be cryptographically verified.
With its self-executory, decentralized, and empirical features, smart contracts could be digital vending machines that would bring Web3 to life.(3) Bringing Web3 to Life with Smart Contracts
Now we know smart contracts are like computer programs that can run independently. Smart contracts use machine-readable data to do things automatically without any middleman or operator. Through the use of smart contracts, we can bring to life many exciting things like DAOs, dApps, and NFTs. These are new and innovative ways to use technology, and they all work together to make Web3 a reality.
Web3 Items Dispensed by Smart Contracts Digital Vending Machines (Source: Avocado DAO)(a) Decentralized Autonomous Organizations (DAOs)
DAOs rely on smart contracts for the establishment of governing rules and execution of majority decisions based on coded consensus mechanisms. These mechanisms refer to how consensus is achieved under the frameworks of smart contracts.
The hegemony of Web2 platforms, which has been described as akin to “digital dictatorships”, brings about barriers to entry issues for content creators' and unfair censorship problems for web users. Through the use of DAOs, the element of control would be taken out of the hands of Web2 platforms and reposed in the hands of creators and users.(b) Decentralized Applications (dApps)
Similar to content creators, consumers too have little alternative but to patronize Web2 platforms even though it means that they are getting the short end of the stick as they would merely be acquiring the leasing as opposed to ownership rights to the purchased content. The advent of smart contracts also has given rise to dApps.
DApps can be thought of as vending machines for digital content that allow you to access and use digital content without needing to go through a centralized platform. The content creator can stock their creations on dApps. When a consumer wants to buy somethings they simply send a cryptocurrency payment to the content creator's wallet and the content is made available to them through the dApp.
Just as a vending machine doesn't require a middleman like a store to sell its products, dApps doesn't require a centralized platform like a social media site to distribute its content. The vending machine owner and the content creator both have more control over their products, and the customers and users have a more direct and transparent transaction.(c) Non-Fungible Tokens (NFTs)
Content creators can sell Digital items on dApps as an NFT, a token recorded on the blockchain, verifying the ownership of the underlying digital item. NFTs are made possible by smart contracts. Smart contracts enable the minting of NFTs, recording the attributes and metadata of the NFTs on the blockchain.
When a buyer purchases an NFT on a dApp, the dApp's smart contract transfers the ownership of the NFT to the new buyer. The ownership metadata of the NFT is edited by the dApp's smart contract and submitted to the blockchain. Buying an NFT on a dApp like Opensea is an example of this.
Web3 powered by smart contracts would break the Web2 mold, ushering in a new online ecosystem where content creators can better monetize their creations, and consumers can acquire ownership rights to digital purchases.(4) Conclusion
In 1994, when Nick Szabo came up with the concept of smart contracts, the Internet was still in its infancy. Fast forward almost three decades later, smart contracts look set to catalyze the rise of the third generation of the Internet in the form of Web3, which would be much smarter than its predecessors.
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Our next course, Immersing Ourselves in the Metaverse Using Immersive Technology, we would discuss how these functions of Web3 enable it to have an almost surreal level of immersion.