What are Smart Contracts?

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3 min read

What are Smart Contracts?

Smart Contracts are digitally binding contracts between two or more parties that do not require a central authority for enforcement. Simply put, the clauses of any contract contain certain terms and conditions which can either fully or partially be digitized, eliminating the need of a central authorizer. Imagine legal contracts being enforced completely digitally. The terms of such contracts can often be broken down into simple transactions, which can then be carried out on the blockchain.

For example, a car loan could be completely enforced digitally using a smart contract. The electronic wallet and digital car keys can act as binding collateral. If the person using the car is unable to pay the monthly lease payment, the smart contract could automatically execute a partial payment, or even lock the keys to prevent the car from opening. The lessee is required to keep his account funded to make regular payments, while the lessor is required to provide digital keys that make the car accessible. The two can simply come to terms with each other using a digital interface, resulting in a trustless contract.

HOW ARE THEY RELATED TO CRYPTO?

Ultimately, smart contracts are what make cryptocurrency such an appealing concept. Cryptocurrency offers a secure and decentralized manner of carrying out transactions between anonymous peers, without the need of a central authorizer. Smart contracts use computer code to employ cryptocurrency to behave in a specific way when triggered by certain conditions. Based on the terms defined in a smart contract, cryptocurrency will know when to move to another wallet or go back to yours.

Blockchain technology, which is the distributed ledger system backing this tech is the main reason cryptocurrency is secure, traceable and irreversible without the need of a central authorizer. Therefore, a smart contract is just code that tells digital coins to move around in a certain way, and since the transactions are executed over the blockchain, they are verifiable and can be used to hold everyone accountable.

WHAT ARE THE BENEFITS?

Smart contracts can be used in a variety of different industries and markets.

They don’t necessarily have to be involved in the movement of funds.
They can be used in supply chain management or the maintenance of health records.

The flow of information and goods in these situations can also be digitized in a secure way and transacted over the blockchain ledger using a smart contract.

The major benefits of smart contracts center around convenience. If all parties can be held accountable to the conditions of a contract right off the bat, then a significant amount of time and cost normally needed to enforce a complex set of terms can be reduced.

When it comes to smart contracts, a lot of legal obstacles are avoided and long processing times are cut short, all while maintaining a high standard of security at a fraction of the cost.

DECENTRALIZED APPLICATIONS (dApps)

As mentioned earlier, smart contracts can provide solutions to a wide range of problems in any field. They provide an efficient and secure exchange of goods and information, allowing for a lot of processes to be streamlined for the sake of convenience and privacy. Applications that employ smart contracts on a blockchain to perform various functions are called Decentralized Applications (also known as dAapps).

There are Dapp stores like “State of the Dapps”, which really showcase how blockchain technology can be used to carry out a wide range of things using smart contracts. From financial services and legal contract drafting to games where purchases in the game can account for real cryptocurrency, dApps can be used for many things. However, it is important to look through the White Paper of a Dapp to check for authenticity before jumping into it. This is normally available on the project’s website.

SUMMARY

Basically, a smart contract is a computer code that represents the different clauses of a traditional contract. This could be applied in a variety of ways allowing people to deal with each other rather than going through a third party.

Applications of this process are called dApps, which are different uses of smart contracts to benefit off the digital security provided by a blockchain ledger. It’s important to research dApps before jumping into them. Look through a catalog of dApps and research its white paper on the project website.

4 min read

What are Smart Contracts?

Smart contracts are digitally binding terms written in computer code and executed on a blockchain network. The concept of a smart contract was first introduced by the American legal scholar and cryptographer Nick Szabo in a paper he released in 1994. Szabo realized that a decentralized ledger could be used to introduce self-executing contracts. He suggested that legal contracts could be converted to computer code and even launched “Bit Gold” in 1998, a digital currency that could be used to execute smart contracts.

The blockchain network provides an information channel that is both secure and highly accessible from anywhere on the planet. These features make it a useful framework to implement smart contracts, which can behave as a personal dealing between two interested parties in a completely trustless process. This has a significant impact on the costs and time involved in enforcing complicated contractual obligations. The clauses of the contract can simply be turned into computer code and executed on a highly secure blockchain network, meaning the transactions occurring are transparent and can easily be validated. Therefore, it is easy to hold all parties involved accountable.

USING BLOCKCHAIN INSTEAD OF A MIDDLEMAN

The blockchain network is designed in a way which allows any two people on the network to interact with each other in a trustless way. Trustless, in this case, means removing the need for trust since the information being processed through a blockchain network can be masked using encryption which hides anything personal.

This means that valuable collateral can be exchanged over the network without the threat of hackers uncovering the personal information of the users involved. In this case, the two parties no longer need to trust each other, just the smart contract. Therefore, smart contracts are self-executing and can involve complex terms that would normally require legal steps to be taken.

Removing the middleman from transactions significantly reduces the time and costs involved with enforcing contracts. Complex dealings like leases, loans, or even the management of property can be coded as clauses in a smart contract, making these transactions much more accessible and efficient.

THE PROS AND CONS OF SMART CONTRACTS

We have discussed many advantages of smart contracts and their wide range of applications. The convenience alone can be a huge motivating factor. Not to mention, the reduced costs and bypassing of legal procedures make it even more appealing. Encoding these contracts digitally is what contributes to their convenience, but the involvement of blockchain allows for another major advantage. Retaining the privacy of the parties involved.

By keeping personal information encrypted on a blockchain network and using the consensus protocol to verify that the transactions of the contract do occur, smart contracts can allow anonymous parties to deal with each other. This trait makes this technology trustworthy enough to fulfill complex contractual obligations.

However, there are some disadvantages that should also be taken into consideration when it comes to mass integration of these contracts. For example, transactions involving physical objects as collateral require these objects to be digitally integrated. For example, the exchange of property, like a house or car, would require a secure digital key that makes them accessible. This would allow both parties to be held accountable since both the cryptocurrency wallet and the digital key can act as collateral in the exchange. Unfortunately, this level of digitization is just not a reality at the moment.

Additionally, while the bypass of legal obstacles can be a huge plus as far as convenience is concerned, it can also create a lot of regulatory challenges. The fact that complex contracts can be enforced completely digitally and no longer require arduous registrations and collection of personal information means that regulatory authorities will ultimately have less control over the exchange of such goods.

THERE’S A DAPP FOR THAT!

Similarly to how web-based applications use the internet to carry out different tasks, a decentralized application can do comparable things on a blockchain network. Decentralized applications involve the exchange of goods, services or even information between two parties over a distributed ledger network. This means that sensitive information can be kept private while transactions can still be verified in a secure way by running consensus protocols. The significant benefits are that decentralized applications are more robust against hacking, since the information is verified by thousands of nodes on the network, and due to encryption tools offered on blockchain networks, sensitive personal information can be exchanged privately.
There are many stores on the internet that offer services in the form of decentralized applications.

This includes online games where items in the game can be of real value in the form of cryptocurrency, such as Etheremon, a world of monsters where you can breed and fight with unique monsters, or sell them for ETH on the marketplace. Many financial decentralized applications are also gaining steam. Stablecoins, for example, use a smart contract which pegs the exchange rate of its underlying currency to a fixed amount and back it with collateral gathered through loans. This removes volatility and helps draft a complex loan structure quickly. To look through a catalog of dApps, we recommend visiting State of the Dapps.

All in all, there are a few hurdles for implementation, but as far as smart contracts are concerned, there is a revolutionary characteristic with regards to the convenience and security that is offered which make them incredibly appealing.

5 min read

What are Smart Contracts?

NICK SZABO’S SMART CONTRACTS AND BIT GOLD

The term smart contract was first introduced in a paper released in 1994 by an American legal scholar and cryptographer named Nick Szabo, who created the term to refer to digitally self-executing legal contracts. Szabo also proposed the concept of Bit Gold, launching it 1998, twenty years before Bitcoin, which was a digital currency used to carry out complex legal clauses in the form of smart contracts. The idea was to take the functionality of electronic transaction methods to the digital realm. Some of these ideas came to fruition before the launch of cryptocurrency. For example, Szabo suggested implementing complex term structure derivatives trading using smart contracts. It was implemented before the creation of blockchain technology and is how derivatives trading commonly takes place.

Nick Szabo was able to realize the power of the decentralized ledger when it comes to executing complex terms and conditions. The clauses of a legal contract can be converted to computer code, which can then be stored and supervised by the network of computers that run the decentralized ledger. Again, this is all prior to the release of blockchain technology and is also why Nick Szabo is rumored to be the famously unknown creator of Bitcoin, Satoshi Nakamoto.

SMART CONTRACTS IN THE CRYPTO WORLD

Blockchain technology has been widely used to implement smart contracts in what is known as Decentralized Applications or dApps. There is an important distinction to be made here. Although Nick Szabo’s version of digital contracts can also be carried out over the blockchain network, the term smart contract means something slightly different in the context of cryptocurrency. Szabo’s smart contracts referred to the exchange of money, property, shares or anything of value, but the modern version of smart contracts apply to general purpose computational algorithms that take place on the blockchain or a distributed ledger network. This slight difference helps us realize the wide range of instances where smart contracts can be applied.

The role of blockchain in a smart contract allows for enforcement of the terms and conditions through a digital code which is verified by all the nodes on the network. It stands in sharp contrast to the central administrative permissions that most activity on the internet requires.

From social media to the exchange of pictures and videos, web-based applications need a central authorizer to validate user information, thus compromising privacy. Smart contracts offer the clear advantage of allowing such activity to be anonymously verified over a blockchain network, thus preserving privacy while still permitting a transaction to occur securely.

BUILDING OWN DECENTRALIZED APPLICATION

Blockchain technology is slowly becoming ubiquitous as a revolutionary way of making our day to day lives more efficient. However, to realize the implications of this technology can be difficult. To construct a whole new blockchain network to run an application requires in-depth knowledge of computer science, cryptography, and mathematics. Computer scientist Vitalik Buterin realized the same problem when he created Ethereum. Being the first altcoin, Ethereum was conceived as an accessible framework for developing blockchain-based applications. The Ethereum blockchain, in this case, acts as a network on which smart contracts can be executed. The underlying security and transparency offered on the Ethereum blockchain can serve as a validator for the terms of these contracts.

Many coins are built for this exact purpose. It has given rise to contract oriented computer languages, like Solidity, where smart contracts can be constructed and run on a blockchain network. Despite concerns about the Ethereum network having slow transaction speeds, the open source adoption of contract oriented languages like Solidity written using Javascript, and Vyper written in Python, are crucial steps for the sake of mass adoption of this technology. These platforms offer blockchain based solutions to a broader range of programmers and developers, rather than the few with the ingenuity and knowledge to reconstruct an entirely new blockchain.

ETHEREUM, EOS, AND BEYOND!

As mentioned earlier, the words Ethereum and smart contract have become inseparable in recent years. This is because the initial conception of coins like Ethereum is to provide interested developers API access to the blockchain network. This allows the development of decentralized applications which can execute smart contracts on this network. In fact, access to the Ethereum network even allows developers to launch their own token as a side chain of the network, to help launch an ICO (Initial Coin Offering) to raise awareness or funds for the project. These are all beneficial tools for those interested in blockchain development.

However, in recent years, there have been specific characteristics of Ethereum that have been called into question. It includes the proof of work consensus algorithm, which requires the completion of complex mathematical problems for the sake of validating a transaction. This protocol has been linked to the slow transaction speeds witnessed on this network. Ultimately, the result of such problems in the Ethereum network caused the creation of cryptocurrencies like EOS, the second largest Dapp building network.

EOS is a token based on the ERC-20 protocol, which is a technical standard used for implementing tokens on the Ethereum blockchain. The purpose of EOS is to improve the Ethereum development infrastructure by tweaking its consensus protocol. This network utilizes a delegated proof of stake algorithm instead, which selects a limited number of nodes in the network as trustworthy for validating future transactions. It saves a lot of time when processing transactions since miners no longer need to compete when trying to win the reward for generating new blocks on the network.

All in all, the launch of new ICO’s and blockchain projects around the world validate the ability of smart contracts to really unlock the potential behind this technology.

From interesting fads, like Crypto Kitties, which explore the idea of rare digital assets, to stablecoins like Dai, which is secured by collateralized loan agreements, the applications of blockchain are regularly being explored via smart contracts.

REGULATORY PROBLEMS AND LEGAL ISSUES

Once the implications of smart contracts become clear, these digital agreements become a legal elephant in the room. Technology that allows the exchange of goods and services between anonymous peers without the need of central authority can be a sensitive topic as far as regulations are concerned. There are limited barriers to stop money laundering efforts and criminal intentions from using blockchain technology to mask their efforts. Since cryptocurrency is largely untraceable, even if the wallet addresses are transparent, the movement of funds and execution of illegal contracts become much harder to detect. It is a significant hurdle for the mass adoption of smart contracts in a day to day life.

Nonetheless, it is essential to understand that the advantages of this technology can indeed be invaluable when it comes to executing complex tasks in a matter of minutes. The blockchain is transformational, but the way things are carried out traditionally makes it difficult to adapt in a major way.

Even if smart contracts make the development of applications more accessible, driving traffic towards these applications due to legal hurdles and regulatory issues is a whole other ball game. Hopefully, in the near future, smart contracts can be integrated into everyday life with collaborative efforts from governing authorities.

Disclaimer: This article is meant to be informative and is not supposed to provide investment advice. Please conduct your own research before making investment decisions.

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