Smart Contracts Definition
Smart contracts are contracts that execute themselves with the terms of the agreement that have been specified in its code. The code and the agreements stipulated in the contract functions across a distributed blockchain network.
Smart contracts allow trusted transactions and agreements to be executed between anonymous parties without requiring a central authority, legal system, or external administration mechanism. This makes transactions traceable, transparent, and irreversible.
Smart Contracts History
The term ‘Smart Contracts’ first appeared in 1994 when Nick Szabo, an American computer scientist invented a digital currency called “Bit Gold” in 1998, 10 years before the existence of Bitcoin.
Smart contracts, as defined by Nick Szabo, are electronic transaction protocols that perform the terms of a contract. He wanted to implement the functionality of electronic transaction procedures, such as POS (point of sale), to digital appliances.
2015 was the launch year of Ethereum, a platform that was specialized in smart contract development and deployment. Its apparition generated a surge in interest for the appliances of smart contracts.
How smart contracts work
Bitcoin was the first coin to support basic smart contracts in the sense that the value transfers could be executed between network peers. The network’s nodes will only authenticate transactions if the required conditions are met.
But, bitcoin’s use of smart contracts is limited to currency transactions.
Ethereum, on the other hand, replaces bitcoin’s more limiting language with a language that enables the development of individual programs.
Ethereum lets developers write their smart contracts or ‘autonomous agents’, that are defined in Ethereum’s white paper. The ‘Turing-complete’ language supports a broader set of computational orders.
Interdependence
A smart contract has independent functionality, but it can also be deployed together with any number of other smart contracts. They can be set up in a way that their execution will depend on one another.
To some extent, various cryptocurrency systems have implemented this method, where all the laws are pre-established and because of that, the network itself can function by itself.
Smart Contracts Objects
The integral parts of a smart contract are referred to as objects. The first one is signatories which are the two or more parties that agree or disagree with the terms of the smart contracts by using digital signatures.
The second object is what they decided on agreeing. This can only be an object that can be found in the smart contract’s environment. Also, the smart contracts must have unconstrained and direct access to the object.
Lastly, any smart contract has to have incorporated specific terms. Those terms have to be mathematically defined entirely and by means of a programming language that is suitable for the particular smart contract’s environment.
Environment
For a contract to exist and function properly, they have to operate within a specific appropriate environment. The environment has to support public-key cryptography, which lets users sign off for the transaction by using their uniquely generated cryptographic codes.
Secondly, they need an open and decentralized database, which can be fully trusted by all contract parties and which is fully automated. Also, the entire environment has to be decentralized for the smart contract to be executed.
Lastly, the source of digital data employed by the smart contract must be entirely reliable. This involves using root SSL security certificates, HTTPS, and other protocols for secure connections that are already in use in most of today’s software.
Smart contracts can:
- Act as ‘multi-signature’ accounts, so that fund spending occurs only when a certain percentage of parties agrees
- Settle various kinds of agreements between users
- Give utility to other contracts
- Store information about a specific application
Advantages
Autonomy — Smart Contracts eliminate the need for a third-party intermediary or implementer, giving a complete control solely to the parties involved in the contract.
Reliability — None of the documents used in the contract can be lost, modified or deleted as they are encrypted and safely recorded on a secured, shared ledger. Also, you are not required to trust the other contract parties or expect them to trust you, as the impartial system of smart contracts essentially substitutes trust.
Cost efficiency — Smart contracts take out of the equation many other intermediaries who charge many operational fees and service costs.
Safety — If the implementation is done correctly, smart contracts cannot be hacked easily. Moreover, perfect environments for smart contracts are encrypted with complex algorithms, which ensure the safety of your contracts.
Speed and efficiency — Smart contracts use automated processes, therefore, they end up saving the time you usually waste on manually processing loads of paper documents, sending them to specific places, etc.
Cons
Smart contracts have emerged in the tech scene quite recently. In spite of its tremendous potential, it still is riddled with issues. For example, the code on which the contract is based has to be bugs- free and execute flawlessly.
This can generate mistakes and, sometimes, to these bugs can be exploited by bad actors. As was in The DAO hack’s case, the money in a smart contract with faulty code can lead to the loss of said funds.
But most of the problems that exist with smart contracts are due to the technology’s young age.
Verdict
The many use cases that smart contracts could provide to the world could save people time and money. But smart contracts are still a technology under development, and more time and development is needed.