Contracts
=========

.. topic:: Summary

   * *A valid transaction must be accepted by the contract of each of its input and output states*
   * *Contracts are written in a JVM programming language (e.g. Java or Kotlin)*
   * *Contract execution is deterministic and its acceptance of a transaction is based on the transaction's contents alone*

Video
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Transaction verification
------------------------
Recall that a transaction is only valid if it is digitally signed by all required signers. However, even if a
transaction gathers all the required signatures, it is only valid if it is also **contractually valid**.

**Contract validity** is defined as follows:

* Each state points to a *contract*
* A *contract* takes a transaction as input, and states whether the transaction is considered valid based on the
  contract's rules
* A transaction is only valid if the contract of **every input state** and **every output state** considers it to be
  valid

We can picture this situation as follows:

.. image:: resources/tx-validation.png
   :scale: 25%
   :align: center

The contract code can be written in any JVM language, and has access to the full capabilities of the language,
including:

* Checking the number of inputs, outputs, commands, timestamps, and/or attachments
* Checking the contents of any of these components
* Looping constructs, variable assignment, function calls, helper methods, etc.
* Grouping similar states to validate them as a group (e.g. imposing a rule on the combined value of all the cash
  states)

A transaction that is not contractually valid is not a valid proposal to update the ledger, and thus can never be
committed to the ledger. In this way, contracts impose rules on the evolution of states over time that are
independent of the willingness of the required signers to sign a given transaction.

The contract sandbox
--------------------
Transaction verification must be *deterministic* - a contract should either **always accept** or **always reject** a
given transaction. For example, transaction validity cannot depend on the time at which validation is conducted, or
the amount of information the peer running the contract holds. This is a necessary condition to ensure that all peers
on the network reach consensus regarding the validity of a given ledger update.

To achieve this, contracts evaluate transactions in a deterministic sandbox. The sandbox has a whitelist that
prevents the contract from importing libraries that could be a source of non-determinism. This includes libraries
that provide the current time, random number generators, libraries that provide filesystem access or networking
libraries, for example. Ultimately, the only information available to the contract when verifying the transaction is
the information included in the transaction itself.

Contract limitations
--------------------
Since a contract has no access to information from the outside world, it can only check the transaction for internal
validity. It cannot check, for example, that the transaction is in accordance with what was originally agreed with the
counterparties.

Peers should therefore check the contents of a transaction before signing it, *even if the transaction is
contractually valid*, to see whether they agree with the proposed ledger update. A peer is under no obligation to
sign a transaction just because it is contractually valid. For example, they may be unwilling to take on a loan that
is too large, or may disagree on the amount of cash offered for an asset.

Oracles
-------
Sometimes, transaction validity will depend on some external piece of information, such as an exchange rate. In
these cases, an oracle is required. See :doc:`key-concepts-oracles` for further details.

Legal prose
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Each contract also refers to a legal prose document that states the rules governing the evolution of the state over
time in a way that is compatible with traditional legal systems. This document can be relied upon in the case of
legal disputes.