Let's say you want to bet 2,500 euros (or its corresponding bitcoin value) that Real Sociedad will win, while your friend is betting the same amount that Atlético de Madrid will win the match. The first step is for you and your friend to put the bitcoins into a neutral account controlled by a smart contract. When the game is over and the smart contract is able to verify through a news site who won, the smart contract would automatically deposit the euros or bitcoins into the winner's account.

Suppose I want to sell a digital art production to a collector. The purchase price is agreed to be made in installments. The payment scheme is entered into a smart contract and, when the deadlines are met, the payments go to my account. After a certain number of payments satisfied, the digital production itself passes to the collector (there is a transfer of the digital asset). Why use a smart contract and not, for example, have the collector make automatic payments from his bank and have a system transfer the digital production when the income is received in my account? The difference is that without smart contracts each party makes independent transactions. In our case the collector can call his bank to cancel the payments. I can always change my system so that the transfer of digital production does not occur. To avoid these possibilities in the real world, it is necessary to establish a legal contract in which we commit to fulfilling our part of the deal. If one of us fails in its commitments, the legal contract will give us the right to enforce the contractual provisions in court. However, you cannot physically stop one of the parties from backing out, while in a smart contract ideally both the digital asset to be transferred and the currency/asset used for payment live in the system. The contract itself is a self-executing transaction between parties, triggered by events that definitively determine whether they will happen or not.[2]​.

Multiple parties collaborate to create a sound recording. There is the composer of the music, a lyricist, musicians, singers, producers and others. The creating parties can embed the licensing terms in a smart contract, and when a consumer purchases the music, royalties can immediately flow to each participating party. No intermediaries are needed to process transactions, or distribute content. These types of systems allow for a more transparent flow of royalties with fewer intermediaries between copyright owners/artists and consumers. Imogen Heap&action=edit&redlink=1 "Imogen Heap (company) (not yet drafted)") and Ujo&action=edit&redlink=1 "Ujo (company) (not yet drafted)") are working on such a system.[2]​.

In the 1970s and 1980s, an information technology movement proposed to implement market mechanisms such as auctions or sales in the field of information technology. Meanwhile, public key cryptography revolutionized what was possible in terms of network security at that time.

The term "smart contracts" was coined by computer scientist Nick Szabo, probably around 1993, to emphasize the goal of bringing what he called the "highly evolved" practices of contract law and related business practices toward the design of electronic commerce protocols between strangers on the Internet. Szabo, inspired by researchers such as David Chaum, also believed that specification through clear logic, and verification or execution through cryptographic protocols and other digital security mechanisms, could constitute a significant improvement over traditional legal contracts. digital money, contract signing, auctions and other commercial mechanisms. Most of the aforementioned examples probably have independent lines of development, and in fact many proponents see smart contracts as the inevitable result of many independent efforts to improve operations in various industries that use digital technology. Currently, several formal languages have been developed, specified or proposed to specify the contractual clauses of these types of contracts.[8]​[9]​[10]​ The IEEE has two working groups specialized in contracts. digital,[11]​ which promote this research to continue in the future.

In 2014 with the publication of the whitepaper: A next generation smart contracts & decentralized application platform, written by Vitalik Buterin, the concept of smart contracts regained its importance, since it proposes adding the proposal developed by Satoshi Nakamoto.

Before the emergence of the blockchain, there was no platform that could make smart contracts a reality, so it was only conceptually defined. Bitcoin itself is an example of a smart contract, where the rules of the game are codified and accepted by its participants. Ethereum, among other platforms, allows you to create Turing complete smart contracts (it means that any program that can be created on a standard computer is also possible to be programmed here) and store the source code in its blockchain. In this way it is possible to create an infinite number of programs that will be executed on each computer on the network and that will have all the benefits of Blockchain technology. The idea of ​​creating different programs based on blockchain technology appears, giving rise to a new decentralized Internet full of decentralized applications.[12]​ The blockchain ensures that all transactions are verified by multiple participants, and only transactions that follow the rules of the smart contract will be confirmed.[2]​.

In February 2021, the General Council of Spanish Lawyers in collaboration with the company CTIoluciones s.l. and Caixabank launched a digital contracting platform associated and conditional on a payment event to facilitate judicial and extrajudicial agreements between lawyers. This platform allows you to formalize and sign a contract between both parties and condition its effectiveness to a bank deposit being made into the account associated with said contract. The initiative was developed based on the idea of ​​the Spanish lawyer José Enrique Rodríguez Zarza[13]​.

Smart contracts can be used in a wide variety of scenarios. They are ideal for carrying out simple transactions, in which parts they must be bound by a set of requirements verifiable by the network, both within the blockchain and external variables through APIs.

Examples of application of smart contracts.

There are currently two large open source projects that work with smart contracts, both of which have made great leaps forward. One is called Codius") and the other is Ethereum.

Codius") was developed by Ripple Labs"), which also created its own digital currency called Ripple. Codius aims to be interoperable between a variety of cryptocurrencies, such as Ripple and bitcoin, although it is managed by the private company.[18]​

In contrast, Ethereum is a brand new currency with smart contracts baked into its payment system. It would replace other "currencies" like bitcoin, but it appears to be more of a community project.

Cryptocurrencies like bitcoin will help smart contracts become a reality. But the effect can also be reciprocal. Some advocates think that new users will be attracted to virtual currencies solely for the benefit of smart contracts.

Smart contracts have various advantages associated with automation and the decentralized infrastructure in which they operate. Among its main benefits is the elimination of intermediaries, which reduces costs, speeds up processes and reduces the possibility of human manipulation. Furthermore, by running on a blockchain, they inherit properties such as immutability, transparency and distributed verification, which increases security and trust in the execution of the agreement.[19]​ They also allow complex conditions to be programmed and digital assets managed without requiring traditional financial infrastructure.[20]​.

However, smart contracts also have limitations. Their rigidity is one of the most noted disadvantages: once deployed, they cannot be easily modified, even when they contain errors in the code, which can cause significant economic losses. Likewise, its legal validity may depend on the regulatory framework of each country, since there is no international consensus on its legal recognition. Another disadvantage is the dependence on so-called oracles, external services that provide real-world data; These can introduce vulnerabilities if they fail or are manipulated[21]​. Finally, the technical complexity necessary for its development may limit its adoption by organizations or individuals without specialized knowledge.

The infrastructure of smart contracts can be implemented by replicated resource registers[22]​ and the execution of the contracts can be carried out using Merkle Trees which operate through cryptographic hash functions and Byzantine fault-tolerant replication which are a generalization of the two general problem.

Each node in the p2p network acts as a registry of ownership and trust or guarantee, executing the changes of the contract holders and automatically checking the rules imposed by the transaction, and also checking the same work of the other nodes. Cryptocurrencies like Bitcoin have special cases implemented for those records or nodes, where the property and core of the transaction is money. Bitcoin and many of its derivatives contain more generalized mechanisms for ownership and contract enforcement.[23] Code maintenance is a very important and latent part of the Bitcoin protocol, based on probabilistic and anonymous Byzantine replication (Proof-of-Work System). One of the proposals to use Bitcoin as records of replication and contract execution is the so-called "colored coins".[24]​ Some examples of applications that use this type of contract execution can be Ripple, Mastercoin"), Ethereum and RSK").[25]​ NXT[26]​.

Applications can include financial instruments such as stocks, bonds and other financial elements where nodes can monitor the events on which the rules of the associated smart contract were conditioned.

To develop smart contracts, special programming languages ​​have been invented to respond to the needs of a program that will be deployed on a blockchain and solve different problems that are usually dealt with in traditional programming. Solidity, Yul, Vyper, are examples of languages ​​that have been created specifically to develop smart contracts and others have been adapted such as Rust. In either case, the languages ​​are constantly updated to respond to the evolution that this technology is having.

The inherent irreversibility of smart contracts can generate significant legal challenges when the effects of a contract must be reversed by court order, for example, due to nullity, voidability or supervening impossibility. From Latin American private law, in texts valued and studied by the European Union, formulas have been proposed to introduce reversibility mechanisms compatible with the block chain, such as unpredictability clauses adapted to the digital environment and the use of arbitration as a "legal oracle" that allows activating corrective effects in self-executing systems, all with the aim of reducing the social and technological costs of a retroactive modification of the blocks.[27]​.

Smart contracts do not require human interpretation or intervention to be carried out. They can be done automatically by running a computer program. One of these applications is autonomous agents, computer programs created for a specific task. An example is a program running in the cloud that rents storage space and offers its end customers a file storage service. With the introduction of Bitcoin, computer programs can control their own funds and sign contracts with cloud service providers[28]​.

Smart legal contracts are different from smart contracts. A smart contract is not necessarily legally enforceable as a contract. On the other hand, a smart legal contract has all the elements of a legally enforceable contract in the jurisdiction in which it can be enforced and can be enforced by a court or tribunal. Therefore, while every smart legal contract will contain some elements of a smart contract, not every smart contract will be a smart legal contract.[29][27]​.

There is no formal definition of a smart legal contract in the legal industry.[30]​.

Smart contracts differ from traditional contracts in the way they are executed and the degree of automation they offer. A traditional contract depends on human interpretation and external mechanisms for its fulfillment, such as courts, financial institutions or intermediaries. On the other hand, a smart contract is executed automatically when the programmed conditions are met, without third-party intervention.[31]​.

Another fundamental difference is the representation of the agreement. Traditional contracts are written in natural language and can create ambiguities, while smart contracts are written in code and require precise definition of conditions, which reduces uncertainty but also limits their flexibility. This rigidity can cause problems when the contract needs to be modified or adapted to unforeseen situations.[32]​.

In terms of security and legal scope, smart contracts depend on the blockchain infrastructure on which they run. Although they offer immutability and censorship resistance, they can also contain bugs in the code that result in unwanted executions. Traditional contracts, for their part, have consolidated legal frameworks that allow disputes to be resolved through legal interpretation, something that is still under development for contracts based on blockchain technology[33]​.

The General Law of Alternative Dispute Resolution Mechanisms,[34]​published in Mexico on January 26, 2024, provides for the following concepts and definitions:.

It is the first regulation in said country that provides, at a legislative level, for aspects such as smart contracts, decentralized justice systems and automated systems (artificial intelligence). The project of this law was drafted by the Working Group on Alternative Dispute Resolution Mechanisms, convened by the Mexican Congress of the Union and installed on August 22, 2023.[35]​ Specifically, the novel regulation of Online Dispute Resolution was led by lawyer Gustavo Cárdenas Soriano, a member of said Working Group, whose project was presented in the Senate of the Republic on November 15, 2023.[36]​.

Let's say you want to bet 2,500 euros (or its corresponding bitcoin value) that Real Sociedad will win, while your friend is betting the same amount that Atlético de Madrid will win the match. The first step is for you and your friend to put the bitcoins into a neutral account controlled by a smart contract. When the game is over and the smart contract is able to verify through a news site who won, the smart contract would automatically deposit the euros or bitcoins into the winner's account.

Suppose I want to sell a digital art production to a collector. The purchase price is agreed to be made in installments. The payment scheme is entered into a smart contract and, when the deadlines are met, the payments go to my account. After a certain number of payments satisfied, the digital production itself passes to the collector (there is a transfer of the digital asset). Why use a smart contract and not, for example, have the collector make automatic payments from his bank and have a system transfer the digital production when the income is received in my account? The difference is that without smart contracts each party makes independent transactions. In our case the collector can call his bank to cancel the payments. I can always change my system so that the transfer of digital production does not occur. To avoid these possibilities in the real world, it is necessary to establish a legal contract in which we commit to fulfilling our part of the deal. If one of us fails in its commitments, the legal contract will give us the right to enforce the contractual provisions in court. However, you cannot physically stop one of the parties from backing out, while in a smart contract ideally both the digital asset to be transferred and the currency/asset used for payment live in the system. The contract itself is a self-executing transaction between parties, triggered by events that definitively determine whether they will happen or not.[2]​.

Multiple parties collaborate to create a sound recording. There is the composer of the music, a lyricist, musicians, singers, producers and others. The creating parties can embed the licensing terms in a smart contract, and when a consumer purchases the music, royalties can immediately flow to each participating party. No intermediaries are needed to process transactions, or distribute content. These types of systems allow for a more transparent flow of royalties with fewer intermediaries between copyright owners/artists and consumers. Imogen Heap&action=edit&redlink=1 "Imogen Heap (company) (not yet drafted)") and Ujo&action=edit&redlink=1 "Ujo (company) (not yet drafted)") are working on such a system.[2]​.

In the 1970s and 1980s, an information technology movement proposed to implement market mechanisms such as auctions or sales in the field of information technology. Meanwhile, public key cryptography revolutionized what was possible in terms of network security at that time.

The term "smart contracts" was coined by computer scientist Nick Szabo, probably around 1993, to emphasize the goal of bringing what he called the "highly evolved" practices of contract law and related business practices toward the design of electronic commerce protocols between strangers on the Internet. Szabo, inspired by researchers such as David Chaum, also believed that specification through clear logic, and verification or execution through cryptographic protocols and other digital security mechanisms, could constitute a significant improvement over traditional legal contracts. digital money, contract signing, auctions and other commercial mechanisms. Most of the aforementioned examples probably have independent lines of development, and in fact many proponents see smart contracts as the inevitable result of many independent efforts to improve operations in various industries that use digital technology. Currently, several formal languages have been developed, specified or proposed to specify the contractual clauses of these types of contracts.[8]​[9]​[10]​ The IEEE has two working groups specialized in contracts. digital,[11]​ which promote this research to continue in the future.

In 2014 with the publication of the whitepaper: A next generation smart contracts & decentralized application platform, written by Vitalik Buterin, the concept of smart contracts regained its importance, since it proposes adding the proposal developed by Satoshi Nakamoto.

Before the emergence of the blockchain, there was no platform that could make smart contracts a reality, so it was only conceptually defined. Bitcoin itself is an example of a smart contract, where the rules of the game are codified and accepted by its participants. Ethereum, among other platforms, allows you to create Turing complete smart contracts (it means that any program that can be created on a standard computer is also possible to be programmed here) and store the source code in its blockchain. In this way it is possible to create an infinite number of programs that will be executed on each computer on the network and that will have all the benefits of Blockchain technology. The idea of ​​creating different programs based on blockchain technology appears, giving rise to a new decentralized Internet full of decentralized applications.[12]​ The blockchain ensures that all transactions are verified by multiple participants, and only transactions that follow the rules of the smart contract will be confirmed.[2]​.

In February 2021, the General Council of Spanish Lawyers in collaboration with the company CTIoluciones s.l. and Caixabank launched a digital contracting platform associated and conditional on a payment event to facilitate judicial and extrajudicial agreements between lawyers. This platform allows you to formalize and sign a contract between both parties and condition its effectiveness to a bank deposit being made into the account associated with said contract. The initiative was developed based on the idea of ​​the Spanish lawyer José Enrique Rodríguez Zarza[13]​.

Smart contracts can be used in a wide variety of scenarios. They are ideal for carrying out simple transactions, in which parts they must be bound by a set of requirements verifiable by the network, both within the blockchain and external variables through APIs.

Examples of application of smart contracts.

There are currently two large open source projects that work with smart contracts, both of which have made great leaps forward. One is called Codius") and the other is Ethereum.

Codius") was developed by Ripple Labs"), which also created its own digital currency called Ripple. Codius aims to be interoperable between a variety of cryptocurrencies, such as Ripple and bitcoin, although it is managed by the private company.[18]​

In contrast, Ethereum is a brand new currency with smart contracts baked into its payment system. It would replace other "currencies" like bitcoin, but it appears to be more of a community project.

Cryptocurrencies like bitcoin will help smart contracts become a reality. But the effect can also be reciprocal. Some advocates think that new users will be attracted to virtual currencies solely for the benefit of smart contracts.

Smart contracts have various advantages associated with automation and the decentralized infrastructure in which they operate. Among its main benefits is the elimination of intermediaries, which reduces costs, speeds up processes and reduces the possibility of human manipulation. Furthermore, by running on a blockchain, they inherit properties such as immutability, transparency and distributed verification, which increases security and trust in the execution of the agreement.[19]​ They also allow complex conditions to be programmed and digital assets managed without requiring traditional financial infrastructure.[20]​.

However, smart contracts also have limitations. Their rigidity is one of the most noted disadvantages: once deployed, they cannot be easily modified, even when they contain errors in the code, which can cause significant economic losses. Likewise, its legal validity may depend on the regulatory framework of each country, since there is no international consensus on its legal recognition. Another disadvantage is the dependence on so-called oracles, external services that provide real-world data; These can introduce vulnerabilities if they fail or are manipulated[21]​. Finally, the technical complexity necessary for its development may limit its adoption by organizations or individuals without specialized knowledge.

The infrastructure of smart contracts can be implemented by replicated resource registers[22]​ and the execution of the contracts can be carried out using Merkle Trees which operate through cryptographic hash functions and Byzantine fault-tolerant replication which are a generalization of the two general problem.

Each node in the p2p network acts as a registry of ownership and trust or guarantee, executing the changes of the contract holders and automatically checking the rules imposed by the transaction, and also checking the same work of the other nodes. Cryptocurrencies like Bitcoin have special cases implemented for those records or nodes, where the property and core of the transaction is money. Bitcoin and many of its derivatives contain more generalized mechanisms for ownership and contract enforcement.[23] Code maintenance is a very important and latent part of the Bitcoin protocol, based on probabilistic and anonymous Byzantine replication (Proof-of-Work System). One of the proposals to use Bitcoin as records of replication and contract execution is the so-called "colored coins".[24]​ Some examples of applications that use this type of contract execution can be Ripple, Mastercoin"), Ethereum and RSK").[25]​ NXT[26]​.

Applications can include financial instruments such as stocks, bonds and other financial elements where nodes can monitor the events on which the rules of the associated smart contract were conditioned.

To develop smart contracts, special programming languages ​​have been invented to respond to the needs of a program that will be deployed on a blockchain and solve different problems that are usually dealt with in traditional programming. Solidity, Yul, Vyper, are examples of languages ​​that have been created specifically to develop smart contracts and others have been adapted such as Rust. In either case, the languages ​​are constantly updated to respond to the evolution that this technology is having.

The inherent irreversibility of smart contracts can generate significant legal challenges when the effects of a contract must be reversed by court order, for example, due to nullity, voidability or supervening impossibility. From Latin American private law, in texts valued and studied by the European Union, formulas have been proposed to introduce reversibility mechanisms compatible with the block chain, such as unpredictability clauses adapted to the digital environment and the use of arbitration as a "legal oracle" that allows activating corrective effects in self-executing systems, all with the aim of reducing the social and technological costs of a retroactive modification of the blocks.[27]​.

Smart contracts do not require human interpretation or intervention to be carried out. They can be done automatically by running a computer program. One of these applications is autonomous agents, computer programs created for a specific task. An example is a program running in the cloud that rents storage space and offers its end customers a file storage service. With the introduction of Bitcoin, computer programs can control their own funds and sign contracts with cloud service providers[28]​.

Smart legal contracts are different from smart contracts. A smart contract is not necessarily legally enforceable as a contract. On the other hand, a smart legal contract has all the elements of a legally enforceable contract in the jurisdiction in which it can be enforced and can be enforced by a court or tribunal. Therefore, while every smart legal contract will contain some elements of a smart contract, not every smart contract will be a smart legal contract.[29][27]​.

There is no formal definition of a smart legal contract in the legal industry.[30]​.

Smart contracts differ from traditional contracts in the way they are executed and the degree of automation they offer. A traditional contract depends on human interpretation and external mechanisms for its fulfillment, such as courts, financial institutions or intermediaries. On the other hand, a smart contract is executed automatically when the programmed conditions are met, without third-party intervention.[31]​.

Another fundamental difference is the representation of the agreement. Traditional contracts are written in natural language and can create ambiguities, while smart contracts are written in code and require precise definition of conditions, which reduces uncertainty but also limits their flexibility. This rigidity can cause problems when the contract needs to be modified or adapted to unforeseen situations.[32]​.

In terms of security and legal scope, smart contracts depend on the blockchain infrastructure on which they run. Although they offer immutability and censorship resistance, they can also contain bugs in the code that result in unwanted executions. Traditional contracts, for their part, have consolidated legal frameworks that allow disputes to be resolved through legal interpretation, something that is still under development for contracts based on blockchain technology[33]​.

The General Law of Alternative Dispute Resolution Mechanisms,[34]​published in Mexico on January 26, 2024, provides for the following concepts and definitions:.

It is the first regulation in said country that provides, at a legislative level, for aspects such as smart contracts, decentralized justice systems and automated systems (artificial intelligence). The project of this law was drafted by the Working Group on Alternative Dispute Resolution Mechanisms, convened by the Mexican Congress of the Union and installed on August 22, 2023.[35]​ Specifically, the novel regulation of Online Dispute Resolution was led by lawyer Gustavo Cárdenas Soriano, a member of said Working Group, whose project was presented in the Senate of the Republic on November 15, 2023.[36]​.