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Smart contracts, first proposed by computer scientist Nick Szabo in 1994, have become a significant innovation in modern technology. These self-executing contracts have the terms of the agreement directly written into code, which allows for trustless, automated, and transparent transactions in various industries.
As Ethereum co-founder Vitalik Buterin once stated, “Smart contracts guarantee a very specific set of outcomes. There’s never any confusion, and there’s never any need for litigation.”
This article will spotlight the inner workings of smart contracts, their advantages and limitations, real-world applications, and their growing role in decentralized technology.
How Smart Contracts Work
Blockchain technology provides a decentralized, immutable ledger for executing and recording smart contracts. This ensures that contract terms and conditions are tamper-proof and verifiable by all parties involved. Popular programming languages for writing smart contracts include Solidity, Vyper, and Plutus.
The process of creating and deploying a smart contract involves several steps:
Writing the smart contract code: Developers create the smart contract by defining the terms and conditions, as well as the actions that will be executed once those conditions are met, using a programming language designed for the chosen blockchain platform.
Testing the smart contract: Before deploying the smart contract to the blockchain, it is crucial to test it thoroughly to ensure it functions as intended and is free from bugs or vulnerabilities that could be exploited by malicious actors.
Deploying the smart contract: Once the code is written and tested, the smart contract is deployed on a blockchain platform. The deployment process involves compiling the contract code into bytecode and creating a transaction that includes the bytecode, along with any initial data required for the contract. This transaction is then submitted to the blockchain network, where it is included in a block and added to the blockchain.
Contract address: When a smart contract is deployed, it is assigned a unique address on the blockchain, similar to a regular cryptocurrency wallet address. This address serves as the contract's identifier and allows users to interact with the contract by sending transactions to its address.
Triggering the smart contract: Smart contracts are triggered by external events or transactions sent by users interacting with the contract. Once triggered, the smart contract executes the predefined actions written in the code if the specified conditions are met.
Execution and enforcement: Smart contracts are executed by the nodes in the blockchain network. These nodes validate and process the transactions, ensuring that the contract's terms and conditions are met before executing the actions defined in the contract. The decentralized nature of blockchain technology ensures that the execution of the smart contract is secure, transparent, and tamper-proof.
Monitoring and auditing: As the smart contract is executed on the blockchain, its transactions and state changes are recorded on the public ledger, ensuring transparency and verifiability. This allows users and auditors to monitor the contract's performance, verify its adherence to the agreed-upon terms, and maintain accountability among the parties involved.
Common platforms for deploying smart contracts are Ethereum, Cardano, and Binance Smart Chain.
As Marley Gray, Principal Architect at Microsoft, explains, “You can think of [smart contracts] as a sort of digital vending machine, where you put some cryptocurrency in and get some digital assets or services out.”
Once the conditions specified in the contract are met, smart contracts automatically execute and enforce the agreed-upon terms.
Are Smart Contracts Really Smart?
The term “smart contracts” can be misleading, as it might suggest that these contracts possess a level of artificial intelligence or can adapt to various situations. In reality, smart contracts are computer programs that execute predefined actions when certain conditions are met.
Their “smartness” stems from their ability to automate and decentralize transactions without the need for intermediaries. To better understand the nuances of smart contracts, let’s delve into their advantages and limitations.
Advantages:
Trustless execution: Smart contracts execute automatically when the agreed-upon conditions are met, removing the need for intermediaries and reducing the potential for fraud or manipulation.
Transparency: The code of a smart contract is visible on the blockchain, allowing for public scrutiny and ensuring that all parties involved are aware of the contract’s terms and conditions.
Efficiency: Smart contracts can reduce transaction times and administrative costs by automating processes that would otherwise require manual intervention.
Security: Smart contracts, when well-designed, can provide secure and tamper-proof agreements, as the underlying blockchain technology ensures that the contract’s terms and conditions cannot be altered.
Limitations:
Lack of flexibility: Smart contracts are only as “smart” as the code they are written in. They cannot adapt to unforeseen or complex situations, and they may struggle with “gray areas” that often arise in legal agreements.
Vulnerability to bugs and hacks: Poorly written or inadequately tested smart contracts can have vulnerabilities that hackers can exploit. The DAO hack in 2016, where around $60 million was stolen due to a flaw in a smart contract, is a notable example of this risk.
Limited scope: Smart contracts are well-suited for specific use cases that involve clear conditions and outcomes. However, they may not be suitable for more complex agreements that require subjective interpretation or human judgment.
Legal and regulatory uncertainty: The legal status and enforceability of smart contracts still need to be clarified in many jurisdictions, creating challenges for their widespread adoption.
Applications of Smart Contracts
Finance and banking: Smart contracts facilitate decentralized finance (DeFi) applications such as lending, borrowing, and staking. For instance, Aave, a popular DeFi platform, uses smart contracts to enable users to earn interest on their cryptocurrency deposits.
Supply chain management: Walmart’s use of smart contracts for food safety showcases how they can streamline tracking and verification of goods. In collaboration with IBM, Walmart developed a blockchain-based system to trace the origin of produce, reducing the time it takes to track a product from farm to shelf.
Real estate and property management: Smart contracts can automate property transfers and lease agreements, reducing paperwork and increasing efficiency. Propy, a real estate platform, successfully executed the first real estate transaction using smart contracts in 2017.
Healthcare: Medicalchain is an example of a project using smart contracts to enhance patient data management. This allows patients to securely store and share their medical records with healthcare providers, improving care coordination and privacy.
Voting systems: The West Virginia state government in the United States tested smart contracts for secure, transparent, and tamper-proof voting during the 2018 midterm elections. This pilot project, called “Voatz,” aimed to provide military personnel and overseas voters with a secure method to cast their ballots electronically, increasing accessibility and reducing the risk of fraud.
Intellectual property and content management: Platforms like Ujo Music utilize smart contracts for automated royalty payments and content licensing, providing artists with a fair and transparent way to monetize their work. Imogen Heap, a Grammy-winning artist, famously released her single “Tiny Human” on the Ethereum blockchain using Ujo Music, which allowed her to bypass traditional music industry intermediaries and receive direct payments from fans.
The Future of Smart Contracts
As research and development efforts continue, smart contracts are expected to improve in terms of security and scalability. Integration with artificial intelligence and machine learning could enhance their ability to handle complex and dynamic situations.
Dr. Gavin Wood, co-founder of Ethereum and founder of Polkadot, envisions that “smart contracts will become more adaptive and responsive to real-world data, making them even more powerful tools for automation and decision-making.”
Addressing the limitations and challenges of smart contracts, including developing new legal frameworks and refining contract code, will be crucial for their continued adoption. An example of regulatory progress is the state of Wyoming in the United States, which passed a bill in 2019 recognizing smart contracts as legally binding.
The potential impact of smart contracts on various industries, such as energy, insurance, and logistics, is vast and growing. For instance, in the insurance sector, companies like Etherisc are developing decentralized insurance products based on smart contracts, aiming to automate claims processing and reduce fraud. In the energy sector, platforms like Power Ledger use smart contracts to facilitate peer-to-peer energy trading, enabling consumers to buy and sell surplus renewable energy directly with one another.
Moreover, smart contracts have the potential to revolutionize the logistics industry by automating and streamlining the process of tracking and verifying shipments. For example, Maersk, a global shipping company, partnered with IBM to create TradeLens, a blockchain-based platform that uses smart contracts to enhance supply chain transparency and efficiency.
Putting Things into Perspective
While not “smart” in the traditional sense, smart contracts offer significant benefits and opportunities for various industries. Their trustless, automated, and transparent nature has already revolutionized sectors like finance and supply chain management.
As smart contracts continue to develop and integrate with other emerging technologies, they will play a critical role in shaping the future of decentralized applications, driving innovation and efficiency in multiple sectors.
As Tim Draper, a prominent venture capitalist, puts it, “Smart contracts are going to have a massive impact on industries across the board. This technology will change the way we live and do business.”
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How Chainlink play role for smart contract ? I guess question is where Chainlink fits. I always hear Chainlink is used to validate data from 2 different block chains ?