WHAT ARE SMART CONTRACTS?
Smart contracts are essentially protocols or computer programs for automated transactions that may be recorded on a blockchain and executed when specific criteria are met. What this means is that smart contracts eliminate the need for a middleman or additional time for the completion of a transaction, allowing all parties involved to know the outcome immediately.
To put it simply, smart contracts are computer codes that contain the terms of a purchase and sale transaction.
Advantages of Smart Contracts
Fast, accurate, and efficient transactions
If a predetermined condition is met, the contract will be instantly executed. The digital and automated nature of smart contracts eliminates the need for human intervention and the time wasted rectifying mistakes made when completing paper forms.
Transparency and confidence
Since there is no middleman involved and encrypted transaction records are distributed to all parties, they may rest easy knowing that their data is secure.
The blockchain’s encrypted transaction logs make them nearly impossible to compromise. Moreover, hackers would need to alter the entire chain to alter a single record on a distributed ledger because each entry is connected to the entries preceding and following it.
Smart contracts save money by removing the cost and inconvenience of middlemen from business transactions.
How exactly do these “Smart Contracts” work?
Smart contracts are a type of program that can be inserted in a blockchain or other distributed ledger to perform certain actions on a virtual machine specifically designed for that purpose.
- In the first step, businesses and developers work together to establish the conditions of the desired response of the smart contract to a set of parameters.
- Simple events are defined and are easy implement. They can include things like shipment receipt, payment authorization, and a threshold reading from a utility meter.
- The next step may require more advanced logic to encode processes like calculating the value of a derivative financial asset or executing an insurance payout automatically.
- Thereafter, the logic is built and tested by the developers using a smart contract writing tool. A second team performs security testing once the program has been written.
- In the next stage, either an in-house expert or a firm with experience in auditing the safety of smart contracts might be consulted.
- After the contract is authorized, it is ready for deployment on a blockchain or any other distributed ledger network.
- Once launched, the smart contract is set up to receive updates on pending events from an “oracle,” which is essentially a cryptographically protected streaming data source.
- Obtaining the required event combinations from one or more oracles is the last step for the smart contract to begin running.
Smart Contract Issues and Challenges
With the use of smart contracts, businesses can ensure the safety of vital parts of processes involving many people. However, because of the novelty of the technology, cybercriminals are always finding new entry points through which to subvert the standards set out by the businesses. In the beginning of Ethereum’s life, hackers stole $50 million worth of cryptocurrency via smart contracts. Inconsistencies in the techniques used to detect various loopholes in smart contract security have been noted as a source of worry, according to the IEEE.
In order to prevent malicious actors from manipulating the execution of smart contracts, it is necessary to fortify at least one oracle (a streaming data source that transmits event updates) against event forgery. It requires careful programming to correctly generate events, which may prove difficult in more complicated settings.
Smart contracts can accelerate the execution of operations involving many parties whether or not they are in sync with the understandings and intentions of all parties. However, when events spiral out of control, with no mechanism to halt or reverse the effect, this capability can also exacerbate the damage done. In terms of manageability and scalability, the Gartner research organization has pointed out that this is a concern that has not been entirely resolved for smart contracts.
It is generally difficult to set up and administer smart contracts. Many times, they are set up in ways that make modifications extremely challenging, if not impossible. Although this feature could be seen as a plus for security, it also means that the parties to the smart contract agreement cannot make any modifications to the terms of the contract or add any new information without creating a new contract.
Smart Contracts: The Wave of the Future
The promise of smart contracts extends far beyond the straightforward transfer of property. From legal procedures and insurance premiums to financial derivatives and crowdfunding agreements, they can handle it all. By automating and simplifying common and repetitive operations for which individuals currently pay banking institutions and lawyers substantial fees, smart contracts have the capability to modularize the legal and financial sectors.
As smart contracts evolve to include features like adjudications of conventional legal contracts and editable smart contract templates, the work of lawyers may change in the long run. Because of their capacity for real-time auditing and risk assessments, as well as their ability to automate procedures and manage behavior, smart contracts can be useful for ensuring compliance.
IoT and edge computing devices are ripe for automation, and smart contracts could be a key component. One use case for this is a service provided by a utility business in which smart contracts are programmed to take action in reaction to fluctuations in electricity tariffs using information from smart meters. Air conditioners and other energy-hogging equipment could have their power cut off or reduced by a smart contract when prices hit a certain point.
Vending machines that accept bitcoin payments and are programmed with smart contracts are another possible application.
In a supply chain scenario, payments may be released from a smart contract if it is determined that a shipping container has reached its destination without being opened and that its contents have been maintained at the proper temperature, humidity, and have not been jostled throughout transit.
Smart Contracts Conclusion
The proliferation of smart contacts is made possible by blockchain technology. Ethereum, Tezos, Hyperledger and Corda are just few of the many systems that enable smart contracts. Smart contracts are becoming increasingly ubiquitous now that bitcoin and related blockchain technologies are gaining traction.
Smart Contracts play a crucial role in Blockchain technology since they ensure the integrity and efficiency of all financial transactions. Additionally, it improves the accessibility of other components, such as apps that run on these platforms. NILWIRE will be using smart contracts and blockchain technology with our NFT project.