Imagine that your contract has learned to execute itself completely automatically, without the engagement of third parties, downtime, and endless checks on whether conditions are aligned. Done? We don’t know what image has occurred in your imagination, but we know all about its real-world embodiment and are excited to share it with you in the short form of the following article.
Let’s talk smart contracts! What are they, how do they work, and what are the Light and Dark sides of this relatively new force on the business horizon? The answers are waiting for you one line below.
What is Smart Contract
A smart contract is an agreement written in a coding language and functioning as a program executed under predetermined conditions. De facto, a smart contract is a complex digital structure called to simplify and secure the agreement process between non trusted parties. To know more about the backstage behind the smart contract’s effect, let’s break this complex structure down into 3 basic elements.
Once made and downloaded into the blockchain, smart contracts can not be changed ever again. This is a result of security measures imposed by the blockchain: as new blocks are added one after another, to change one, you have to pass through all the blocks going after it, which is close to impossible. Above all, immutability means that smart contracts are immune to being tampered with while also enabling permanent timestamping.
As every smart contract is stored on the peer-to-peer distributed network, no one is in charge more than the other one. All parties can equally interact with the contract using it as a mirror for the process covered by its content. Distributiveness also grants transparency as every action covered by the contract’s conditions is tracked by it and revealed to all interested parties simultaneously.
Once downloaded and installed on the blockchain, smart contracts become automatically functioning programs unreachable to any interruptions. If predetermined events are triggered, a smart contract is executed in a predictable manner. This means that there is no need for intermediaries to ensure the contract’s sustainability. Delays caused by the human factor are gone as well. As a result, you get an efficient and prompt way of bargaining management.
How Smart Contracts Work
Have you heard the saying, a man is known by the company he keeps? Well, it’s just the same with smart contracts. The total majority of smart contracts are accommodated in blockchains, which are peer-to-peer networks based on the principles of distribution and decentralization. A block of data is an essential constituent element of the blockchain, while cryptocurrency transactions represent integrals of such blocks.
A smart contract is added to the blockchain block as one of its transactions, with the average size approximately amounting to a few KBs. Considering that one block’s size spans from 1 to 8 MB (1MB=1000KB), it is safe to say that a smart contract is a low-energy technology and, not less importantly, a cost-saving one.
The algorithm of the smart contract’s practical implementation is as simple as the following:
- Decide whether you would like to write the contract’s code by yourself or, if IT is not your profile cup of tea, apply for the assistance of developers experienced precisely in solutions for your target sphere, for example fintech software development services
- Identify the goals and tasks of your agreement in detail while keeping in mind the complete immutability of the smart contract once it is deployed into the blockchain
- Choose the blockchain that hosts smart contracts’ accounts in accordance with your agreement’s objectives and the scale of tech stack supporting the technology desirable in your specific case
- Write the contract using a dedicated language (Solidity, Vyper, Rust, etc.) and software to compile and edit the code
- Compile the contract’s code and deploy it on the blockchain in the same way it works for transactions (at this stage, a standard crypto transaction is a way blockchains actually “see” your smart contract)
- Ready! You’re brilliant, and your smart contract is launched to the blockchain’s outer space: distributed across all its nodes, immune to any malicious interruptions, executing a mission assigned to it providing fulfilment of the predetermined conditions in a predictable manner.
Smart Contract Use Cases
The range of industries where smart contracts can potentially be applied is incredibly wide. Let’s discuss a few use cases of these blockchain-based agreements implementations that already exist out there.
Use cases of smart contracts
- Supply Chain: Let’s take grain delivery. Smart contracts can control that supply chain’s processes within every stage: from rain delivery freight charges to the grain quality management (impurity content, humidity degree, etc) with the help of IoT devices.
- Dapps: Abbreviation ‘dapps’ stands for Decentralized Applications and means such applications that are located on decentralized servers ultimately represented by peer-to-peer networks of blockchains. Dapps’ backend is based on the smart contract, while their interface is standard for all user-friendly apps. Decentralized apps can be used for multiple purposes. For example, fintech software developers leverage dapps to create platforms for secure financial operations, such as fundraising, free of third parties.
- Insurance: Smart contracts can be used for insurance of various objects, for instance cars. Again, IoT devices can be used to supply smart contracts with the relevant data about the person’s driving manner and monitor a vehicle’s properties to identify the exact reason for the caused damage.
Smart Contract Pros and Cons
Of course, as with any other advanced technology out there, smart contracts have both undoubtful utility virtues and some explicit drawbacks. So let’s take a black and white perspective and consider both colors to obtain a broad picture.
- Transparency and clear visibility of the processes covered by the contract within all stages: if the conditions are not fulfilled properly, the smart contract will show where exactly it happened
- Security: if your app is based on the smart contract, it will operate as a superhero invulnerable to external threats like hacker attacks
- Confidentiality. It is not necessary to use real-world identities with smart contracts, so parties can keep their incognito and still be sure that the contract’s conditions will not be violated or tampered with by any other participant
- Smart contracts cannot be changed and updated, so any mistakes or discrepancies made via the writing stage will remain in the contract’s code unless another contract cancels the previous one
- There is no legislation frame describing smart contracts; thus, their legislation power of is lower than that of an agreement made by an attorney
- Methods of smart contracts’ data supply are not perfect and need further improvements with the help of other technologies, such as the Internet of Things
Progress is constantly on the go, and innovative technologies have a game-changing impact on all domains of human activity. In this context, smart contracts are marked with one of the highest development rates through the means of technological progress of its own and alliances with other tech peaks. Security guarantees associated with blockchain and capacities for self-execution make smart contracts comparable to AI in terms of the bargaining process.