Blockchain technology is the basis of any cryptocurrency. But there is another thing built on top of the blockchain that is currently bringing us the next global revolution. It’s a smart contract. And it will change the world just as much as cryptocurrencies have already done.
You don’t have to be incredibly smart to figure out how a smart contract works. At least it is much easier to explain that blockchain.
Quite another thing is to understand all perspectives of smarts contracts and their possible implementations.
A lot of countries and governmental institutions already started using smart contracts for different affairs. As any contract is an inevitable part of any deal, smart contracts are simply the advanced technology to benefit contractors more.
Today smart contracts propel a lot of things from most p2p crypto transactions to the newest NFT appliances.
Let’s try to dive into the smart contract concept and look at how it changes the world around us.
Smart contract history
Along with cryptography pioneering, the first blockchain and smart contract ideas were put on paper back in the 1990s.
You’ve probably heard about Nick Szabo – a US computer scientist who also can be a mysterious Bitcoin creator Satoshi Nakamoto.
There isn’t a lot of info about Szabo on the web. We even don’t know his precise date of birth or whether he is still alive.
The myth tells Nick Szabo developed the ‘smart work contract’ concept to use ‘advanced contract law methods within electronic commerce protocols through the Internet’.
Later in 1996, Szabo wrote a definition of an ‘intellectual transactions cost’. By that, he meant the intellectual efforts (actually computing power) required for product evaluation and decision making define the allowable microtransactions size.
In 1998, Szabo presented a totally new decentralized digital currency mechanism or simply ‘bit gold’. We know this mechanism as a direct precursor to the Bitcoin architecture. It’s one of the reasons why there is a theory claiming Szabo actually was Satoshi Nakamoto.
But what is important for us in terms of this article is the fact that the smart contract concept widens the idea behind Bitcoin.
What is the modern smart contract definition?
Szabo called smart contracts the ‘computerized transaction protocols that execute contract conditions’.
But today most crypto experts define a smart contract as a self-executing computer program that uses blockchain to store the contract’s terms and conditions.
Simply put, a smart contract ensures the fulfillment of conditions between buyer and seller. The system provides it by writing the conditions and their status directly into computer code lines.
Then the smart contract waits for the embedded conditions to meet. Then the contract executes itself.
This concept allows using smart contracts for building different decentralized applications (Dapps). Trading, finances, insurance, construction, travel, and real estate are the few spheres where smart contracts are already implemented.
But let’s talk about it a bit later and dive into smart contract technology.
How are smart contracts related to blockchain?
Firstly you should know that blockchain and smart contracts aren’t the same.
As a type of distributed ledger technology, blockchain records transactions with cryptographic signatures and shares the ledger copies in a peer-to-peer network of nodes. These nodes are blockchain users’ computers.
To add the transaction to the blockchain majority of the users have to approve it. Then transactions are combined into blocks, kept in order, connected by hashes, and so on.
How a smart contract works?
The general concept is the same for all types of smart contracts: each computer on the network (node) stores a copy of all existing smart contracts data and their current status. alongside the blockchain and transaction data.
When a buyer fulfills his conditions and sends funds – the smart contract code’s become executed by all nodes in the network. Then the outcome reaches a consensus and results in a flow of value.
Users that securely run complex financial transactions even with unknown entities guarantee this value.
If it sounds a bit complicated for you, look at how Szabo himself described his idea: “These new securities are formed by combining securities (such as bonds) and derivatives (options and futures) in a wide variety of ways. Very complex term structures for payments can now be built into standardized contracts and traded with low transaction costs, due to computerized analysis of these complex term structures”.
Szabo also compared his smart contracts to a vending machine. Like, if you put money into the machine and select a soda, the machine’s hardware to give you a drink and the change. In the way soda machines can sell you drink without a human intermediary, smart contracts can automate virtually any kind of transaction. There is no need for additional human control.
“Smart contracts work by following simple “if/when…then…” statements that are written into code on a blockchain. A network of computers executes the actions when predetermined conditions have been met and verified,” the IBM website explains finally.
Smart contract pros and cons
Now let’s take a look at smart contracts advantages and downsides.
Smart contract pros
Like a blockchain itself, a smart contract makes any transaction traceable, transparent, and irreversible.
More precisely, a smart contract saves your time as it is immediately executed when conditions are met. There is no paperwork to deal with, so you can get rid of bureaucracy.
A smart contract also provides a high level of security as participants would exchange only the encrypted transaction logs. No one can steal your information as no third parties are involved.
It’s also difficult to hack the system. Remember that the system shares the ledger copies of nodes through the whole network? So hackers would have to change the entire chain to forge a single record.
And last but not least, smart contracts save your money as you don’t have to pay the intermediaries. Surely, most blockchains have fees, but it’s much smaller than any broker’s services.
Smart contract cons
Speaking about smart contract limitations you should know that it’s almost impossible to change. So any error in the code can be very expensive to correct.
Developing systems also have loopholes regularly, which increases the errors chance.
And you can often find smart contract terms and conditions to be complicated, so the third party involvement isn’t excluded. At least for a novice users of smart contract technology.
Who uses smart contracts?
Actually, any crypto trader directly or indirectly uses it.
But if we are speaking about its business implementations cases – smart contracts are leading the ongoing digital revolution now.
Here are some of the most interesting smart contracts applications:
AXA insurance company provides flight delay insurance through Ethereum smart contracts. This smart contract insurance works with the database recording flight status.
The condition in the smart contract applies the insurance policy if there is a flight delay of more than two hours, for instance.
The smart contract holds AXA’s money until meeting that certain condition. So nothing can alter the agreement.
Blockchain voting is one of the most popular implementation cases everybody talks about.
The smart contract mechanism also stands behind this concept. The idea is to simply eliminate the chance of identity fraud and to register every vote on a blockchain network.
Smart contracts can add or remove members, change voting rules or change debating periods, etc.
Last year Sierra Leone became the first country to run a blockchain-based election. 70% of the voters used the smart contracts (Agora’s blockchain) for giving their political preferences.
Safeguarding the efficacy of medications
Smart contracts can also solve problems of special medications transportations. For instance, now it’s important to transport some COVID-19 vaccines under strict conditions.
Such blockchain-based platforms as Pharma Portal are now tracking temperature-controlled pharmaceuticals through the supply chain.
The system provides trusted, reliable and accurate data across multiple parties. And it’s really a life-saving thing.
NFT smart contracts
The NFT smart contracts can store the transaction details about digital intellectual properties within the blockchain. Again, it’s all about stored transparent information about the legitimate transaction between two parties.
The smart contract technology can be useful in the all-media industry where creators are struggling to sell their content and got royalties fairly.
Now you can find blockchain-based music streaming platform Muzika, or blockchain startup Mediachain, which had been developing a “decentralized media library”.
Do all blockchains support smart contracts?
Well, most of the popular blockchains do. But there are different kinds of smart contracts.
For instance, Bitcoin is a smart contract platform by definition and it uses a variety of such contracts to enable secure BTC transactions.
At the same time, Bitcoin does not offer support for complex smart contracts, so it’s hard to build Dapps around it.
Ethereum is the leading blockchain for smart contracts
Still, Ethereum is the most popular smart contract platform, which fuels a lot of other blockchain projects like EOS, Neo, Tezos, Tron, Polkadot, Algorand, etc.
Being a prominent smart contract framework, Ethereum implements a Turing-complete language on its blockchain. Bitcoin instead provides a Turing-incomplete script language that allows the creation of custom smart contracts on top of Bitcoin.
These are multi-signature accounts, payment channels, escrows, time locks, atomic cross-chain trading, oracles, or multi-party lottery with no operator.
There are also proof-of-stake blockchain platforms for smart contracts like Cardano, which has a bunches of original Dapps.
So you can find smart contracts everywhere. Just try to look deeper through any of your crypto services.