Blockchain technology is making steady strides when it comes to seeing a boost in its adoption and the platform being used to create decentralized apps, software, and even social media platforms. Blockchain technology is not merely limited to cryptocurrencies but has a huge use case other than that.
People just realize the overall scope of decentralization and how blockchain technology can help them regarding their businesses, development of new apps, and or smart contracts. Non-fungible tokens, which are the digital manifestation of art, as well as smart contracts, which are the deeds drawn up between two parties and backed up by blockchain technology, are some of the less known areas of scale regarding blockchain technology. But with more awareness coming out, the use case, as well as the adoption of smart contracts, is increasing day by day.
What is a Smart Contract?
For someone who isn’t very well acquainted with the idea of smart contracts, here is a brief definition that will help them understand the topic. Smart contracts are basically automated agreements that are digital in nature and are made between the creator of the contract and the parties involved. The whole thing is put together via code, and agreement in itself is made part of the blockchain technology. This makes it irreversible and immutable, which means neither the creator of the contract nor any other party involved would be able to back out of the conditions agreed upon primarily.
The amplest use case for a smart contract is to automate the progression of an agreement so that all parties that are involved would be sure of the final outcome right from the beginning; it also removes the need to have intermediaries. Smart contracts can also be used to automate a certain workflow or set up the operation, which would only go into motion if certain circumstances and conditions are met.
Another term that is thrown out more often than not is the executed contract. This is a duly signed contract by two or more parties involved in a contractual setting and thus is known as the executed contract. Each and every party involved in this contract agrees solemnly to hold up the legal duties which they agreed to when writing the agreement, and they would have to hold up their end of the deal once the contract is thoroughly signed. Smart contracts find their origin on Ether, which is the second most tempting blockchain out there, and another use case for Ether’s blockchain is the development of decentralized applications.
One of the key benefits of smart contracts is that you don’t need an intermediary. When the agreement is written in code and subjected to a blockchain, and all the involved parties have cosigned the whole thing, there isn’t a need for an intermediary such as a bank or another payment processor to transfer the funds from the client to the freelancer because the blockchain would be able to do that automatically. All that is required is that the parties involved agree on the terms of the contract and co-sign these.
Working Mechanism of Smart Contracts
To be able to understand how smart contracts work, you need to apply the if-then logic to the working mechanism of smart contracts. When the conditions of the agreement are written, these are subjected to an if-then logic which means that if the needs of the group are met only, then the whole thing will transpire further, and the contract be subjected to completion. If the needs of the group members or parties involved are not met, then the contract would remain open and incomplete.
Suppose that a retailer has asked a wholesale merchant to deliver 100 cans of tomato paste and, in doing so, has locked the funds in a blockchain environment developing a smart contract between the retailer and the wholesale merchant. When the wholesale merchant delivers the product, he gets paid automatically, and if he doesn’t, the contract remains open and in action until the moment he delivers the product.
This is only a small case for smart contracts and only depicts a certain scenario in which smart contracts would be employed. Surely there are many other domains and practical use cases for smart contracts out there, such as these can be used to replace the present government candidates and policies and serve the retail systems along with seeing a definitive clause or agreement between two parties honored without the use or need of an intermediary.
Another extreme advantage of smart contracts is that there is no possibility for dispute and thus taking the disagreements into court, which eventually would save all the parties included tons of money and time. The security that is catered to these smart contracts is in the form of the definitive code, which is unbreakable, not prone the manipulation, and is rigid. On Ether’s blockchain, these contracts are drafted in the ‘solidity-programming-language,’ and it is referred to as ‘Turing-complete’.
This literally means that all the clauses and rules of the smart contracts are thus embedded into the code of the network, and no cybercriminal is able to manipulate or change these rules. These limitations are there for a reason which is to mitigate any sense of scams or alterations to the given conditions of the agreement. The smart contracts would only be completed and seen through if all included parties agree to the conditions and sign the thing; after that, it is developed, and the contract is binding.
To be able to understand the hidden mechanics of smart contracts, you can break down the very operation for this into dedicated steps. First of all, for a smart contract to be developed, an agreement needs to be struck between either two or more intended parties. Once an agreement has been established, all included parties would have to agree on the conditions of the smart contract, and only after they have agreed will the contract will be seen through as completed. The decision pertaining to this will be written in code embedded deep into the smart contract, and after that, it is relocated to a specific blockchain and encrypted properly.
Once all the arrangements depicted in the smart contract are processed and completed, the payment of the transaction in question will get pressed on the specific blockchain, and all the nodes would update themselves with the authentication of the transaction and executing it. In doing so, they will also be refreshing the present network’s state with all thus bustling information. This brings to mind that Bitcoin and many other cryptocurrencies out there can also use smart contracts. In a way, yes, these can, but the execution of the concept is extremely limited. You can say that every Bitcoin transaction ever made was a very basic interpretation of the concept, but it is just that basic and nothing advanced as Ether proposes the use of smart contracts to the users.
Many blockchains out there are being referred to as distributed ledgers for a dedicated cryptocurrency, but Ether is definitely a prominent and unique case because it is considered a ‘distributed-state-machine’ that has an ‘Ethereum virtual machine’. The machine’s state is being regulated by all Ether nodes, and it keeps a copy of all smart contracts ever developed, including their code and the very rules or terms of the agreement to which these smart code-crafted contracts must follow.
As all smart contracts out there are being controlled by Ether nodes and the code is embedded deep into every node, all Ether smart contracts contain the same aspects of restrictions. If you thought that smart contracts and a written contract are the same things, then you are gravely mistaken.
There is a lot of difference between a written contract and a smart contract; for instance, the language a written contract is written in is human, and for a smart contract, machine computer code is used. The conditions for a written contract could just be written on paper and passed on to the concerned parties, whereas conditions in terms of a smart contract are embedded into the blockchain. The clauses or terms of agreement for a written contract could be modified or interpreted, but in terms of a smart contract, the conditions are generally immutable.
Benefits of Smart Contracts
There are multiple benefits that you can crack out of smart contract blockchains; some of these are efficiency, accuracy, trust, security, savings, and even the transparency of the whole deal. But the most enchanting benefit of smart contracts does not have to wait for an intermediary or some other third party broker between you and some other person or organization. All of this could be made automated and placed in the hands of the blockchain because once the terms are drafted, these are immutable and would be carried out just the way the code was written.
Smart contracts are able to automate certain actions and procedures to the likes of computer protocols, thus saving multiple hours on end. There is also a much-decreased possibility of manipulation of the clauses or terms of the agreement because there are no intermediaries or brokers that are helping you with the contract, but the fate of the whole thing rests on the shoulders of decentralized blockchain systems, which is persistently accurate down to its very core.
Because there are no intermediaries whatsoever, you don’t have to pay any fees or money to them at all. All the parties involved in a smart contract have open access to the terms and conditions along with full visibility at all times. It can also be assumed that once the contract has been signed, there is no way to back out for any of the parties involved. This makes sure that the transactions which are to be performed are completely transparent for each and every member of the smart contract.
In case of data loss or some other such event, the smart contracts wouldn’t be lost because these are being duplicated many times around the clock, which allows for originals to be restored at such typical events. All smart contracts are encrypted with the best cryptographic algorithms, which means that these can’t be tampered with or manipulated in any way possible. Last but not least, the smart contracts also propose no dedicated errors, which could be present when the whole thing is manually drafted and collected in the form of a written contract, but you don’t have to worry about that with the smart contracts.
Major Challenges Faced by Smart Contracts
When discussing the benefits of smart contracts, the efficiency of these was discussed at length, but these are not entirely perfect. Smart contracts and blockchain systems out there are crafted by humans; that is why human error remains a possibility that could lead to exploits. The code could be perfect and the security intact, but when it comes to human error, there is nothing that can be done. Reportedly there was an attack previously on ‘Ethereum’s-decentralized-autonomous-organization (DAO). Cybercriminals were able to get into the ‘DAO’s-fundraising-smart-contract’ and then exploited the terms to secrete the funds from the project.
There is also no regulatory clarity of any kind, which makes it extremely hard to follow these automatic agreements. The idea of streamlining the transactions and the reduced work for drafting the smart contract and their autonomous nature is definitely tempting, but in reality, there is still a whole lot of ground to cover. Such as there is taxation involved, and other government entanglements are also something to consider. It is possible that the users who want to go with smart contracts want no interference in it but then how can governmental associations get their hands on things that they require?
Also, there is no compatibility with the outside data for these smart contracts whatsoever. They can only process and interpret information of the networks in which they currently reside. It might become possible in the future, but at present, it is not a possibility. In simpler words, even if you want to upload some tempting piece of data into a smart contract on Ether, you simply can’t do it.
But there is an unofficial workaround present where Oracle is able to help the smart contracts extract information/data from the Internet and thus making it extremely compatible with the blockchain in which the smart contract resides. It is also a possibility that in the near future that Oracle will be able to help streamline this eventuality between blockchain networks and the rest of the Internet where compatibility is an issue.
Another potential issue with the concept of smart contracts is scalability. It isn’t like adding new servers or processing power to a website, and the load would get balanced, and transactions would start to occur in a timely manner. First off, things don’t work like this in a decentralized environment. This needlessly makes transactions lengthier in terms of their execution and could take a matter of minutes, all depending on the current network activity. With certain upgrades, such as the likes of Ethereum 2.0, this situation could possibly be solved in a gradual manner. But if you look into it then it is still better to have transactions that will pull through in a matter of hours rather than waiting for days on end, as is the case with conventional modes of payments and transactions taking place in the centralized world.
Future of Smart Contracts
To say that smart contracts would be able to completely replace the handwritten ones in the future is cutting it a little too close because no matter at what pace technology evolves and continues to do so, there will always be room for the written word. So, smart contracts might not be able to completely replace handwritten ones, but with the advancement in technology and the up-gradation of blockchain systems, smart contracts could definitely go mainstream.
Automation is a critical aspect of smart contracts because it helps all the parties involved to reach a mutual end to the contract, and only then is the transaction done regarding the finances. There is also the possibility of various small blockchain systems banding together to provide a service in this regard to businesses worldwide so they can save their time and money and at the same time be able to completely redefine the way business is conducted, and deals are honored.
Furthermore, there is limited to no human involvement required to draw up a smart contract which means that people working in government organizations and the administration workers won’t have to deal with the mess of the contracts and could go about doing their jobs, saving time and money in the process.
As a matter of fact, smart contracts are already being employed by a number of financial organizations around the world, and their popularity is only going to increase in the future where it is expected that smart contracts would become the go-to solution for anyone involved in a business or conventional deal and wants to ensure that it goes through without any hassle. But the only thing that might interfere with the success of smart contracts is the regulatory indulgence of the governments around the world, but if it can be sorted out, then smart contracts really do have a bright future.
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