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What is a smart contract?

This is a question that, these days, has become impossible to answer without starting the digital equivalent of a bar fight. The minute that term is thrown out in a conversation, most people immediately think “Ethereum,” or “Solana,” or “TRON” or any of these decentralized in name only (DINO) projects that have popped up over the years since the inception of Bitcoin.

Most new or uninformed people in this ecosystem probably think that the term “smart contract” was coined by projects like Ethereum, and that these projects literally invented them.

When they hear “smart contracts,” they probably immediately start thinking about decentralized autonomous organizations (DAOs), decentralized exchanges, automatic market makers and other such Turing-complete applications on Ethereum. Conceptually, anything that doesn’t approach that level of complexity is probably immediately dismissed by most people as not a smart contract. But nothing could be further from the truth.

The Birth of Smart Contracts

“Smart contracts” as a term was coined by Nick Szabo back in 1996 before the idea of a blockchain was even a twinkling in Satoshi’s eye. They had nothing to do with DAOs, or decentralized exchanges or any of these types of constructs that people tend to think of when they hear the term.

The concept was drastically more simple and basic than any of these systems built on top of platforms like Ethereum. Smart contracts were simply taking conventional legal contracts and finding ways to move the enforcement of them outside of the scope of governmental jurisdictions into the realm of enforcement through software and hardware as much as possible.

To quote Szabo himself[1]:

“New institutions, and new ways to formalize the relationships that make up these institutions, are now made possible by the digital revolution. I

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