Today, we’ve taken the liberty to discuss one of the most popular TOPICS on the market, Smart Contracts. Let’s first ask the most fundamental question.
What is a smart contract?
Smart Contracts began way before the blockchain technology we are accustomed to today. It was first conceptualized and created in 1997 by Nick Szabo, a computer scientist and cryptographer specializing in digital currency and digital contracts. His goal was to use a distributed ledger to store contracts.
Smart contracts are virtually automated agreements between two parties, usually the contract creator and the recipient.
It’s the same as a real contract, except that this contract is digital.
Everyday transactions would need a bank or any centralized authority to approve a fund transfer or whatever agreed-upon condition from party A to party B that’s not the case with smart contracts.
Smart contracts are hugely popular because they eliminate the need for a third party to oversee an agreement well, and it being immutable and distributed, meaning that once it’s written up, it can’t be altered by any party (once two parties agree on a particular concept the process is done automatically).
Simply put, smart contracts are programs stored on a blockchain that execute their functions when predetermined conditions are met.
Digital “if-then” statements between two parties are written as code onto the blockchain.
Once the conditions between the contractor are met, a network of computers verifies and confirms this and thus executes the terms written on that contract and only the two parties can see the results of the contract.
Smart contracts can only follow the instructions given to the contract.
The most commonly used analogy is that of a vending machine.
You put money into the machine, you select which snack you want, and instantly, you have the snack.
So, let’s take the Ethereum platform, for example.
You can write up a smart contract if you have Ethereum’s currency, Ether.
The Ether is used to power up any transaction made on the platform.
You can create an Ethereum-based smart contract using Ether to sell or obtain services. All Ethereum-based transactions are specified using smart contracts. It’s simple, time efficient, safe from cyber attacks, with zero potential for any mistakes.
How Smart Contracts Work?
Let’s simplify the process of a smart contract into a few easy steps:
Contract Creation: First, we create the contract. Think of it like writing down the rules of an agreement, but instead of on paper, it’s in computer code. This code has all the details about the contract, like who’s involved and what the rules are. After writing it, we upload it to the blockchain.
Contract Trigger: Once our contract is on the blockchain, it’s waiting to be triggered. This could happen for various reasons, depending on what the contract is about. For example, in a contract for selling something, the trigger might be when the buyer makes a payment.
Contract Execution: When the contract is triggered, it automatically follows its code. This could mean moving money around, recording a transaction, or doing other things the contract says. The blockchain takes care of making sure everything happens correctly and can be seen by everyone.
Contract Completion: After the contract does its thing, it’s done. The results of what happened are written onto the blockchain, making a permanent, unchangeable record of the whole deal.
REAL-LIFE EXAMPLES
The technology smart contracts use can also aid in reducing claims fraud. In terms of insurance, we see millions of dollars spent every year processing claims, with a huge bulk of those millions going to fraudulent claims.
With smart contracts, frequent error checks and processing times will lower the cost for consumers as well as policing the administer policies much more efficiently.
Let’s say you have a smart contract for car insurance.
You pay the company to have funds available in the event that you find yourself in an accident. As part of the agreement, you may have to pay a deductible fee before you can access the funds for repairs.
You take your car to the shop, pay the deductible, and the contract will then be activated. Now, the car shop has access to the funds to start the repairs to patch things up.
Smart contracts can also be used to protect sensitive medical data in healthcare.
With data breaches being so common that over 4.5 million patient recordshave been compromised.
If patient data was stored on a blockchain using a smart contract, it is virtually impossible to hack, leaving the information to be accessed by the patient and medical providers only.
Given the healthcare crisis after the COVID situation, don’t be surprised to see this as a reality in the next couple of years or even months.
Security Challenges With Smart Contracts
Of course, like anything, smart contracts have their own set of issues.
Here are a few:
First and foremost:
FrontRunning
n non-tech terms,
Frontrunning is like getting a sneak peek at someone’s plans before they’re official.
Imagine this: before a transaction is confirmed on the blockchain, it hangs out in a waiting area called the memory pool. Now, traders can check out these pending transactions, and if they’re willing to pay more fees, they can jump ahead in line and confirm their transactions first.
This sneaky move is often done automatically and is a common issue in decentralized finance apps.
Then, we have the:
Block Gas Limit.
The block gas limit in Ethereum is like a cap on how much stuff can happen in a block. Think of it as a rule that says, “Hey, transactions, you can only use a certain amount of gas.”
Gas is like fuel for transactions.
Now, here’s the catch: if a transaction tries to use too much gas, it’s like hitting a roadblock. The transaction won’t go through, and nothing will happen.
Here’s where it gets tricky. Let’s say a bunch of data is stored in resizable arrays (kind of like flexible lists), and the transactions start going through these lists. If the number of items in these lists gets too big, especially in the real world where many people use it, the transaction can run out of gas and fail.
Irreversibility
Once a smart contract is set, it’s like writing on a stone. If the law changes or the two sides want something new, tough luck! You’ll have to scrap the old contract and start from scratch, which can be a headache.
Then there’s the data problem. For straightforward stuff like marriage papers, going digital is easy. But what about contracts where you can’t just put a number on things?
Testing On A Small Scale
This is a big problem because everything seems fine when these contracts are tested with a small group of users. They pass the tests, and people think they’re working well. But as more and more people join and the amount of data grows, these contracts can break.
When that happens, it might mess up the funds, and fixing it becomes tricky, especially if ongoing payments are involved.
Cross Border Laws
Smart contracts are like super-fast messengers for money and stuff across countries, and they cut out the intermediaries. But here’s the catch – they need to follow each country’s rules, and making sure everyone agrees can be tricky.
Governments might even want to keep an eye on these transactions, which kind of defeats the purpose of going peer-to-peer and skipping the third-party check.
There are more speed bumps, too.
Don’t forget about the big international laws. The European Union has this rule that people can ask to be “forgotten” online. But forgetting you is a bit tricky if you’re part of a digital contract.
Conclusion
Smart contracts run on their own without needing middlemen. This not only saves time but also lowers the chances of disagreements. Since everything happens in computer code, it brings our transactions a new level of honesty, safety, and speed.
Smart contracts could very well replace real contracts not just in the financial sector but in just about every industry out there. Only time will tell when these things finally come to fruition