Exploring smart contracts
A smart contract is a contractual agreement written that is implemented using a software. Unlike a traditional contract where parties may seek remedial action through the legal system, smart contracts are self-enforced (possibly also self- executed), depending on whether specific conditions that are monitored through software are met.
Smart contracts are written in computer coding languages and are embedded on the top of the blockchain. They contain all the relevant information- rules, criterion, terms of expiry, and all the conditions which need to be met for fulfillment. The smart contract behaves in a predefined manner- if one condition is fulfilled, it will complete the designated action.
Imagine a smart contract with the explanation of Don Tapscott:
“It’s a contract that self-executes, and has a payment system built into it, sort of like a contract that has built-in lawyers, governments and a bank account.”
The term smart contract is not that new. Nick Szabo coined the terms in 1994 with the intent to “highly evolved” practices of contract law and practice to the design of e-commerce protocols between strangers on the Internet.
Super simple example of a smart contract:
John and Bob decide to make a bet. John says he will pay 1 Bitcoin to Bob if it rains in the Sahara. These conditions are recorded on the blockchain: the rain needs to be more than five mms, and they set the parameters of the Sahara with geographical coordinates. They include a meteorological station as an oracle, which records the precipitation on the blockchain. At the moment, when in the defined geographical area the rain reaches 5 mm, 1 Bitcoin will be transferred from John to Bob.
Smart contracts elevate the decentralized ledger: on the top of registering transactions, the smart contract also executes them, while providing transparency, efficiency, and trust. These transactions and past contracts are saved on the blockchain, providing extra security against outside manipulation and history of all data. They provide equality between all the parties, without the risk of a different interpretation of conditions. The outcomes of the smart contract are enforced, obligations cannot be avoided. With the inclusion of smart oracles, which define whether specific requirements are met, legal parties, transactions with a smart contract can be made more accessible and more cost-effective as well.
When it comes to smart contract security we came a long way. The complexity in the programming language and the novelty of the subject caused some major flaws in the system in the beginning- for example, the DAO hack in 2016 cost $70 million.
We can assume that these exploit attacks were the result of beginner’s mistakes in the blockchain world, and better smart contract development is on its way. It is a big task- there is a huge difference between agreements that are understandable for a computer and understood by people. In the human world, so many things are subject to interpretation, and contracts work well when that interpretation between parties is the same. Computers, however, need to have each contract detail defined to be able to execute.
The smart contracts are progressing- more and more decentralized applications involving smart contracts are developed on the biggest network for development Ethereum. There are also other blockchains which have perfected this function, and applications which make smart contract creation intuitive. Smart contracts bring us an amazing automated, smart future, and they are an essential part of blockchain functions.
What agreements do you think could be replaced by smart contracts? What are the smart contracts behind your favorite dapp? What would you like to know more about this technology?
Let us know!
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