A "Smart contract" is an essential component of applications built on blockchains. Blockchains act like publicly distributed ledgers or digital record books that store records of transactions.
"Smart contracts" are clusters of computer codes that autonomously execute digital agreements when specific pre-established criteria are satisfied. Smart contracts on the blockchain enable trustless transactions by removing the need for intermediaries or validators to monitor and approve transactions. Therefore smart contracts allow two parties to execute agreements on the blockchain without knowing or requiring to trust one another.
They're used to automate the execution of a contract or the workflow so that all parties can be sure of the result immediately, without high operational costs, intermediaries, or idle time.
How do "Smart Contracts" work?
Smart contracts are autonomous programs built with simple conditional statements like an if-then-else block code. When predefined conditions get satisfied and validated - the computer network carries out the predetermined activity. These activities could include sending notifications, releasing payments to the correct parties, or generating a ticket.
The code is reproduced across several blockchain nodes and thereby benefits from the blockchain's security, durability, and data integrity. In addition, the blockchain is updated once the transaction gets completed. Hence, the transaction is unalterable, and the results are only visible to those with access.
There can be as many specifications as needed in a smart contract to convince the stakeholders that the task will get executed correctly. Participants must decide how transactions and associated data get represented on the blockchain, accept the "if/when...then..." rules that govern those operations, investigate all possible exceptions, and provide a framework for resolving disputes to establish the conditions.
The smart contract can then be coded by a developer — though firms that use blockchain for business provide significant templates, web interfaces, and other online services to facilitate the development. Solidity is an object-oriented programming language for developing smart contracts on various blockchain systems, the most popular of which is Ethereum.
On the Ethereum network, Smart contracts implement and administer blockchain operations when users (addresses) engage with one another. Ethereum smart contracts are composed of two public keys and a contract code. They must get deployed via a blockchain transaction and can only execute when triggered by an EOA (externally owned account) or other smart contracts.
Advantages of Smart contracts
- Automation: The most significant advantage of a smart contract is the automation it provides. There will be no interruptions, and no third party can amend the agreement or decision. This automation would go a long way in assisting businesses in automating some portions of their operations. Not just that, but it also resolves trust concerns in various processes as the entire decentralised network is trustless.
- Accuracy: Data accuracy gets ensured by blockchain technology. The contract executes immediately once a targeting condition is satisfied. Because smart contracts are virtual and automated, there is no paperwork to deal with and no time spent manually correcting errors when filling out documentation.
- Transparency: No information will be tampered with for personal gain because no third party is engaged. Encrypted transaction logs get exchanged among participants. The Smart contracts' source code is immutable and also publicly viewable.
- Security: Transaction records on the blockchain are encrypted, making them extremely difficult to hack. Furthermore, each record on a distributed ledger gets linked to the preceding and subsequent entries. Thus, hackers would have to change the entire chain to modify a single entry.
- Custom-Made: Blockchain Smart contracts can be custom-made. As a result, they can be used to build various Decentralised applications (DApps).
- Cost-Effective: Smart contracts eliminate the need for mediators to manage transactions and the time and expenses that come with them.
- Back up: Blockchain Smart contract is like a distributed ledger, which means that all documents get duplicated many times, allowing for file recovery.
- Speed: When the criteria of a smart contract are satisfied, it can execute immediately. One of the reasons these contracts work effectively for financial services and cryptocurrency trading is that the wait time is nearly negligible.
Applications of Smart Contracts
- Improving the efficiency and speed of international trade: Using smart contracts, blockchain-based platforms provide uniform rules and streamline trading choices to decrease friction and risk while simplifying the trading process and boosting trade prospects for participating businesses and banks. Thus, creating a global financial ecosystem based on trust for international trade.
- Creating efficient retailer-supplier relationships: Blockchain networks are distributive, highly secured, and resistant to alteration. Companies employ blockchain Smart contracts to resolve vendor issues. Smart contracts strengthen connections with suppliers through real-time communication and better insight into the supply chain, resulting in more time for vital work and development.
- Improved tracking and data transparency: Improved tracking and data transparency through Smart contracts assist businesses in identifying inefficient sectors and implementing cost-cutting strategies. The so-called procure-to-pay gaps could be solved using smart contracts. Buyers would save money on payables. Sellers would get funding faster and no longer have to participate in dunning. It could influence working capital needs and make financial operations easier for both parties.
- Revolutionising the healthcare industry: A Smart contract can completely transform any industry. Blockchain Smart contracts are immutable, thus helping establish incorruptible medical records databases. Effective data exchange and synchronisation, surveillance, and supervision of healthcare products and services can help the healthcare industry. In addition, interoperability is beneficial to patients.
- Helps in establishing digital identity: Digital Identity is one of the most prominent use cases of smart contracts. It can assist counterparties in learning about a person without knowing their confidential information or verifying transactions. This frictionless KYC can increase interoperability, robustness, and compliance.
- High Security: Equity ownership administration can be simplified and enhanced with smart contracts. No gatekeepers, including security custody chains, exist between the parties. Dividend income, automated payments, liability management, and stock splits are possible. Smart contracts can also help to reduce operational risk and simplify procedures.
- Improving Financial services: Smart Contracts enable the creation of a Defi ecosystem. Smart contracts can also aid in the improvement of financial services such as mortgages and loans. It can accomplish so by connecting the parties and ensuring that the entire process gets performed smoothly.
It is simple to manage the consistent financial data recording across a company using smart contracts, resulting in lower auditing, accounting, and reporting expenses.
Future of Smart Contracts
At the moment, smart contract input parameters and execution steps must be precise and objective. As a result, smart contracts' actual tasks are pretty simple. However, it will become more complex and capable of handling sophisticated transactions as blockchain usage grows and more assets get tokenised.
The Not-So-Ideal smart contracts
Smart contracts consist of human-written computer code. As a result, there are several hazards because the code is prone to vulnerabilities and bugs.
Because smart contracts cannot make HTTP requests, they are unable to obtain information about "real-world" occurrences. Using external data could compromise consensus, which is critical for security and decentralisation.
The legal enforceability of smart contracts is a significant concern, mainly because the blockchain infrastructures they enable are essentially borderless, distributed networks.
The contract size is another limitation of smart contracts. For example, a smart contract can only be 24KB long before it runs out of gas.
Smart contracts have undoubtedly had a significant impact on the world of cryptocurrencies and have unquestionably transformed the blockchain space.
Smart Contracts are evolving into a combination of paper, and digital information- where contracts are validated via blockchain and supported by a physical copy as more DeFi Apps get installed worldwide and the NFT markets grow in value.
Smart contracts are a good illustration of "Amara's Law," which states that we tend to exaggerate new technology in the near term and underestimate it in a long time, as described by Stanford University computer scientist Roy Amara. Smart contracts must grow before they are used widely in complex business interactions. However, they can transform the reward and incentive structure that will determine how participants contract in the future.
For that reason, when considering Smart contracts, it is critical not to limit one's thought to how the current concepts and frameworks can be adapted to this new technology; instead, the actual Smart contract revolution will happen from entirely new paradigms that we are yet to imagine.