What is a smart contract?
The term smart contract was coined and first used by Nick Szabo in 1994 long before any cryptocurrencies came into existence. He is a computer scientist, cryptographer, and a legal scholar. A smart contract is just like a contract which is used in the real world, and it is a computer programme which is stored inside of a blockchain. Smart contracts are trackable and irreversible. In today’s world, various cryptocurrencies have implemented smart contracts.
So let’s take an example, we all know about the famous crowdfunding platform “Kickstarter.” Basically, Kickstarter acts as a third party in between the supporters and the project team, so if the project is funded, then the project team expects to get the money from Kickstarter. And on the other side, the supporters want a refund if the project has not reached its goal. A smart contract can replace Kickstarter which is the trusted third party in this case. We can program a smart contract so that it holds all the received fund until a particular condition is met (a goal is achieved), the supporters can now transfer their money into the smart contract. If the project is fully funded, then the smart contract automatically transfers the money to the creator of the project whereas if it fails to achieve its goals, then the money is transferred back to the supporters. Some other smart contracts examples are RootStock (a smart contract platform that is connected to the Bitcoin blockchain through side chain technology) and the famous cryptocurrency ethereum which uses a nearly Turing-complete language on its blockchain, a prominent smart contract framework.
How smart contracts work?
Smart contracts are programmed using Solidity which is a contact-oriented programming language for writing smart contracts. It can then be used to implement the smart contract on various blockchain platforms. There is a specific type of algorithm known as “Byzantine fault tolerance” which allows decentralization and provides digital security so that a smart contract can be created.
Smart contracts can:
- Function as ‘multi-signature’ accounts as a result money is only spent when a certain number of people agree, or a condition is met.
- Manage various kinds of agreements between parties or users, example if one party purchases insurance from the other.
- Provide utility to other agreements or contracts (just like a software library works).
- Store and manage data about software or application, for example, club membership records or data of domain registration.
How can smart contracts be used?
Smart contracts are now used in many various fields because it is cheaper (reduces labor costs) and more convenient. Some of the industries where smart contracts are actively being used are Financial services for trade clearing and settlement, coupon payments, insurance claim processing, and microinsurance. Energy and resources is another field where smart contracts are useful for example- a customer deposits money into a machine, and it starts charging an electric car and then returns the remaining funds, it is also used cross-industry (peer to peer transactions, supply chain, and voting).
- Smart contracts come in handy if you are running a small business where you are producing, buying or selling goods because not only does it enhance the supply chain but also reduces the overall costs. It improves the supply chain by allowing the management to track product movement from the factory to the outlet or even to the shelves. Smart Contracts provide real-time visibility of an entire supply chain, so in case your goods are stuck at customs you will be informed immediately.
- Another use for smart contracts involves self-parking vehicles, so in case of an accident with the help of blockchain and an Oracle program an insurance company could find out who was in control of the car, the driver or the sensors. Insurance firms could also use smart contracts to charge different prices in different conditions.
- Healthcare is just another field where smart contracts fit in perfectly. To be more precise these may help in the management process of electronic medical records. The smart contacts can provide transfer along with access to those records trough multi-signature approvals of the patents and the providers. It can also be used to access the health data of general population, for example, a user can allow health researchers to access his or her personal health data. Micropayments are automatically transferred to the patients account for participation. An excellent use of the smart contract is to track patients’ personal health data with the help of IoT devices. Later, it can generate the rewards for certain milestones automatically. Like exercise for a certain amount of time or burn a certain amount of calories.
- Smart contracts can be beneficial for large retailers so for example the relationship between a retailer and a wholesale firm can be enhanced. Even if the contract and the obligations are well understood by both parties a lot of complicated management administration work has to be done. Smart contracts can help automate invoices, checklists, and other reports by using blockchain, however, at times verification may be required from one of the two or both parties.
- Some governments are more visible than others, and all of them operate in various ways. However smart contracts could change the way governments operate by improving efficiency and data transparency. Smart contracts could be used for identity management, contract management, and voting. Smart contracts would overall make the government a lot more efficient because most of the inefficiencies can be cut using smart contracts and blockchain. For example, you can sell your car without the need of a third party so you can directly sell your car using an app and there will be no need to go to the government offices to change the car owner.
- A Smart contract recently replaced an escrow company in under $60,000. The primary reason for this is that smart contracts are way more efficient in peer to peer transactions, they are less time consuming, and much less effort is required. Most importantly it is a very reliable and trustworthy system, and they maintain privacy. Various websites are actively using smart contracts for peer to peer transaction.
Why are smart contracts great?
A smart contract is an excellent technology, and they let you do various useful things on the blockchain in the most secure, transparent and cheap way. Smart contracts can easily replace the middleman in an agreement which as a result will cut costs. It can remove the middleman in the real estate industry, help enhance lotteries to make it fairer and better. The only risk is unforeseen scaling other than this problem the blockchain and smart contracts are the future of agreements, and we may see a world where there won’t be a middleman in the process of agreements.
Some pros of smart contracts are:
- There is no third party involved in an agreement or contract, and so the fees charged by a broker, for example, is gone, and this cuts cost.
- It is a very trusted and reliable system which has proven to maintain privacy for some time now.
- The blockchain is very secure although some smart contracts may not be very secure because they are programmed using code which is vulnerable and buggy at times. However, if used in the right way and processed with proper care, then it is much more secure than traditional contracts.
- Smart contracts are entirely accurate when it comes to a transaction, although some good amount of work needs to be put in to make it really accurate but when programmed the right way it is a 100% accurate.
- One of the leading reasons smart contract is preferred and has gained so much attention is because of how fast and smooth it is, there is no doubt that with the help of blockchain smart contracts can speed up the process and it can also speed up the data upload into individual blocks in cryptography.
Are there any flaws in smart contracts?
Yes, just like every other software and computer blockchain and smart contracts have some problems too and are not perfect.
Some cons to note are:
- They are not very secure, or moreover, they are vulnerable, for example in June of 2017 a bug was exploited in the code of a reliable and one of the most trusted Ethereum wallet which had cryptocurrency worth over $30 million. In June of 2016, a hacker stole over $50 million worth of cryptocurrency by exploiting a bug in the code which programmed a smart contract. The amount of money involved is the incentive for hackers so invest all their time and resources in trying to hack into these wallets.
- It is growing too fast, the number of users increased from 500,000 to 2,000,000 in under four months so although the security concern is a small issue at the moment, it will become a significant consideration in the coming future.
- The code is written by human beings which means there is a chance of human error. These errors can be very costly to the users especially when it is a bug which can grant access to the user’s wallets.
- Although it is cheaper implementation costs still have to be paid for, and it is necessary to have experienced programmers who may charge a very high rate.
Smart Contract Platforms:
Smart contracts are no rocket science, it is used by various platforms, and anyone with a computer and an internet connection can make smart contracts. Smart contracts have made some very famous and highly valuable cryptocurrencies like bitcoin and Ethereum possible today. Anyone can make smart contracts and learn a lot from it and about it.
Here are a few platforms which use smart contracts:
Ethereum smart contract is a platform developed especially for and specifically for making smart contracts. For example, a user can transfer 5 Ether to another user on a specific date. The user will simply make a contract and push the information to the servers so that it can execute the code.
NXT smart contracts use Turing complete scripting layer to develop smart template contracts. Users can choose the template which best fits their need and then modifies it to their precise preference.
Bitcoin smart contracts, you must have heard of the famous cryptocurrency bitcoin, and although its main purpose is the transaction of bitcoins in its platform, it still allows smart contracts to be developed on its platform. However, these smart contracts have limited functionality.
Ardor smart contract is like the baby of NXT. NXT has developed and launched a customizable ardor platform. It will allow users to build their own blockchain with Ardor. The process will still be based on the technology and code used for NXT.
Ripple had its own platform called codious where users can develop smart contracts however it was discontinued the development of codious saying it is too immature for blockchain.
What is the future of smart contracts?
Smart contracts are the future of blockchain. Smart contracts are already used by various huge companies in today’s world. In the coming future, smart contracts might extend beyond cash, and it might allow the purchase of tangible and intangible goods. One problem though for intangible and tangible goods is that smart contracts can only run in a world of the blockchain. The future of smart contracts is bright- Maersk, the world’s largest shipping company, is already planning on launching smart contracts to track its cargo. They are in the test phase at the moment, and one test has been completed successfully which helped them monitor containers remotely. Various banks are experimenting with smart contracts too. Other than these a lot of firms like electric supplying companies are using smart contracts so if you do not clear your bill by the start of the month then electricity is automatically cut and is only restored as soon as the payment is made.
to sum up…
A smart contract is an excellent technology which if used correctly can be of great use. They reduce costs and human efforts, and we might see a world where smart contracts will almost replace traditional contracts.
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