Can a computer program replace a written contract?

Partly. A smart contract is a computer program that automatically executes, controls or documents actions according to the terms of an agreement, so it can take over the enforcing: the code carries out the deal itself, which is meant to reduce the need for trusted intermediaries, arbitration costs and fraud. What it does not replace is the law: a smart contract does not typically constitute a valid binding agreement at law. The idea is older than blockchains. By 1996, computer scientist Nick Szabo was using the term for agreements enforced by hardware or software instead of by law, and his example was ordinary: a vending machine.

The idea needed somewhere to run. Ethereum was conceived in 2013 by programmer Vitalik Buterin, and its original white paper described Bitcoin as only a weak version of Szabo's concept, proposing a stronger version built on a Turing-complete language. Since Ethereum's 2015 launch, "smart contract" has come to mean general-purpose computation on a blockchain: code and data deployed through cryptographically signed transactions, as the US National Institute of Standards and Technology puts it, whose effects cannot be manipulated without modifying the blockchain itself.

The legal side is still catching up. A 2018 US Senate report noted that the concept is rooted in basic contract law: usually courts adjudicate disputes and enforce terms, but with a smart contract, a program enforces the terms built into its code. US states including Arizona, Iowa, Nevada, Tennessee and Wyoming have passed legislation on their use.

Code that enforces itself also enforces its mistakes. Bugs in a smart contract, security holes included, are visible to everyone yet may not be quickly fixed. In June 2016, an attack on a smart-contract project called The DAO drained about US$50 million worth of ether at the time, and Ethereum's developers clawed the funds back only by doing a hard fork of the Ethereum software.