Smart contracts are the next step in the evolution of blockchain technology. They combine the best aspects of a classic contract and a computer program , allowing users to create completely autonomous agreements that can be executed without the need for human interaction. The purpose of smart contracts is to implement the terms of a deal without resorting to the services of a third-party intermediary .
Smart contracts work using a combination of code and blockchain , which allows all network participants to access information at any time and from anywhere in the world. A smart contract contains all the terms of an agreement in a programming language , allowing it to automatically enforce obligations by both parties once certain pre-set conditions are met.
Smart contracts are currently one of the most interesting and promising developments in the world of blockchain technology, as they are able to optimize and secure many aspects of business processes. They have a wide range of applications , from providing financial services to creating decentralized digital identities.
The history of smart contracts
Smart contracts were first proposed by Nick Szabo in 1994 as a mechanism to digitize and codify simple contractual clauses . In 1996, researchers Haber and Stornetta introduced the concept of “colored coins”, which allowed digital assets to have additional properties . This innovation was further developed by Koenigsberg in 1997, who proposed a fully decentralized smart contract platform built on top of secure hardware.
The problem with these early ideas was that they did not address the need for a secure but decentralized platform for deploying and executing smart contracts. This led to the development of Ethereum by Vitalik Buterin, who solved this problem by using the blockchain as a storage layer for smart contract code and assets. This meant that the deployment of smart contracts became more secure . It also meant that Ethereum could run more complex programs than its predecessors, allowing it to become a general-purpose computing platform. This is why many consider Ethereum to be the first blockchain-based smart contract platform .
Smart contracts have the following properties :
- Self-executing : Smart contracts are stored on a distributed blockchain system and are automatically executed when certain conditions are met.
- Transparency : All parties have access to the same information and no party can change the data without consensus with the others.
- Immutability : Smart contracts cannot be changed or deleted once deployed on the blockchain, they can only be replaced with new versions.
- Decentralized : Smart contracts are stored on a blockchain and executed by a network of computers , not controlled by any single entity.
Smart contract objects
- Asset : Something of value can be traded and can be easily accessed through a smart contract without human intervention.
- A set of rules that define the relationship between two or more parties involved in an agreement: these rules must be mathematically describable and therefore programmable. This is an important point, since it is the conditions of a smart contract that describe the logic of its execution. A transaction trigger is an event that initiates the execution of a contract. For example, the moment when a user deposits funds into a cryptocurrency wallet.
- Parties to the transaction : the participant who owns the asset to be exchanged and the participant who will receive this asset.
- Decentralized platform: the platform on which the smart contract will be created and executed.
How a smart contract works
Smart contracts are often compared to vending machines , which have a similar operating principle: both provide access to an asset (coffee or money) after payment has been received. Smart contracts can be represented as if-then statements : if a certain condition is met, then the corresponding instructions are executed. This allows a high degree of automation to be achieved , which makes smart contracts particularly useful for processes involving multiple parties.
Once signed by all parties involved in the contract, smart contracts are stored digitally on the blockchain and take effect when all conditions are met. They can also interact with external systems through blockchain oracles , which allow them to map data to external resources.
Differences between a traditional contract and a smart contract
A traditional contract and a smart contract are agreements that bind the parties to certain obligations. However, there are some fundamental differences between them:
Application areas of smart contracts
Smart contracts can be used to manage many transactions , from the transfer of money between parties to complex business processes such as payroll and inventory management. This is due to their capabilities : automating routine tasks, excluding intermediaries , and, accordingly, reducing transaction costs, reducing errors due to the human factor. Thanks to these opportunities, smart contract technology finds its application in many areas:
- DeFi (Decentralized Finance) is a term that refers to the use of smart contracts for financial transactions . It is often used as a synonym for crypto lending, but it actually covers much more than just lending. Decentralized finance can be used in many ways: peer-to-peer cryptocurrency trading , derivatives trading through a derivatives exchange, decentralized exchanges (DEX), etc.
- Smart contracts can also be used for crowdfunding . Crowdsourcing financing is the process of raising money from a large number of investors (usually in small amounts ). It has become a popular way to fund new ventures, social media projects , and even films . Services such as Kickstarter and Indiegogo are examples of platforms using a similar system.
- DAO is a decentralized organization that uses blockchain technology to provide financial and governance transparency . The main goal of this type of organization is to reduce the need for a centralized authority, reduce operating costs , and improve efficiency . The most common use case is the automation of certain business functions , such as fund management and decision making.
- GameFi is an innovative trend that brings together the two most popular industries – gaming and blockchain . The project is an ecosystem that brings together players, developers, publishers, influencers and advertisers. The goal is to create a decentralized marketplace where all participants can directly interact with each other. The system uses smart contracts to ensure the security of user funds , the ability to send and receive payments.
- Smart contracts are an essential part of blockchain technology, which is why they are often used in ICOs (Initial Token Offerings) to control the issuance of tokens. The algorithms are programmed to identify users who have invested their funds in the project and enter them into the general register . After registration, users automatically receive the required number of tokens.
In addition to managing the distribution of tokens, smart contracts automate accruals by identifying investor users and help verify their legitimacy by automatically monitoring user responses to transactions.
Other applications of smart contracts:
- Healthcare : Sharing and managing patient data , including medical history, insurance information, and other personal information.
- IoT (Internet of Things): Automate the management of IoT devices, including their location, functionality, and status.
- Insurance : claims management for insurance policies. Smart contracts can eliminate fraud and reduce costs by automating processes such as claim verification and payout distribution.
- Gambling: Ensuring fair and transparent conditions for players. Smart contracts can eliminate fraud and reduce costs by automating payout verification.
- Scope of supply : tracking the movement of goods from the point of departure to the point of destination , with the guarantee that goods and services will be paid for on time and in full .
- Elections : Smart contracts can be used to automate the voting process and accurately count votes , eliminating errors and falsifications.
- Arts & Media: Tracking ownership of works of art and media.
- Taxation : automation of calculations and collection of taxes.
Classification of smart contracts
The very first smart contracts could only perform simple actions in response to a limited set of conditions. But as this technology has developed, various types of contracts have appeared that can perform increasingly complex functions . Modern smart contracts can be divided into the following categories depending on the given criteria:
By execution environment: centralized and decentralized
Centralized smart contracts are hosted on a single server, also known as the “master” contract. All other copies of this contract (called “child” contracts ) are linked to the main contract and follow the same rules .
Decentralized smart contracts reside on multiple computers (called “nodes”). Each node is a copy of the original contract and has identical copies of all other nodes .
By the method of initiation: automated and non-automated
Automated smart contracts are executed automatically . They are triggered by certain events (for example, the delivery of goods) and store information in the blockchain.
Human smart contracts require manual input or intervention to be executed. A common example is a will, which requires at least one person to sign it in order for the provisions to take effect.
By degree of privacy: confidential, partially confidential and open
Confidential smart contracts are contracts that can only be accessed by participating parties .
Semi-private smart contracts are contracts that are allowed to be accessed by all parties, but not by the general public.
Open source smart contracts can be viewed by anyone with access to them.
By the process of setting and fulfilling conditions: freely programmable, limited or preset
Arbitrarily programmable smart contracts can fulfill any possible condition .
Constrained smart contracts require a specific set of conditions to be met before they can be executed.
Pre-installed smart contracts cannot be modified once they have been installed by the interested parties .
How to develop a smart contract?
Definition of project requirements
The first step in developing a smart contract is to clearly define the business terms and requirements for your project . For example, if you are creating a smart contract that will be used by customers to pay for goods and services, you will need to specify how much money is required for each payment. You must also determine when payment is due and how many days after delivery the buyer must make the first payment before late payment interest begins to accrue. This will help you ensure that your smart contract correctly implements these requirements. If your project’s requirements change during development, it’s important to make sure any changes don’t break the functionality or security of your smart contract .
Choosing a blockchain platform
The next step will be the choice of blockchain, which will depend on the requirements of your project . There are many blockchains, and each of them has its own strengths and weaknesses. For example, some blockchains provide more security than others, and some have higher transaction throughput than others. You can also consider the size of your project ; if it is supposed to be very large , then you should choose a blockchain capable of processing at least 100 transactions per second (TPS).
Here are some points to consider when choosing a blockchain for smart contract development:
- What type of blockchain do you need?
- What features does it offer?
- How safe is it?
- Is there any risk associated with using this blockchain ?
- Does it have any known bugs or vulnerabilities ?
- As for scaling issues – can we expect to use our system on a large scale in the future?
- As for compatibility – does this system work without problems with other systems?
- Are there any major issues (bugs) that will affect us in the future if we choose this particular blockchain over others available now or in the future?
Ethereum is still considered the leader in the number of running smart contracts , however, it is expensive , slow and has problems with scaling . Therefore, other blockchain platforms such as Cardano, Polkadot, Solana and others have been gaining popularity lately.
Here is a comparison of the most popular blockchain platforms for hosting smart contracts:
Smart contract development tools
The tools for developing a smart contract are:
- Programming languages : Solidity, C++, Java, Go are some of the most common languages for developing smart contracts. The most popular smart contract programming language is Solidity . It was created by the Ethereum Foundation in 2014 and is what most Ethereum projects use to create their own smart contracts . Other languages used: Rust, C, Vyper, DAML.
- IDEs (Integrated Development Environments): Remix, SettleMint and EthFiddle (web version), Visual studio Code, Atom (desktop version). IDEs help developers write code , compile it, and run tests. They also provide debugging tools to troubleshoot any issues you may encounter during development.
- Frameworks : Hardhat, Truffle, Brownie, DappTools, ApeWorX. Frameworks are used by distributed systems to maintain their state across different machines or nodes in a network . They can be used as an alternative to traditional databases when working with blockchain technology.
- Testnets : Rinkeby, Goerli, Kovan, Hyperledger, Umbra, Ropsten. Testnets allow developers to test their smart contracts before deploying them to the main blockchain network, where they will be used by real users and businesses.
- Crypto wallets: Metamask, TrustWallet, Coinbase, Enjin, AlphaWallet, Binance and Chain Wallet. Smart contract wallets provide access to decentralized applications (Dapps) and related Web3 interfaces for testing .
Development of a smart contract prototype
At this stage, the actual code is written based on the requirements specifications. The goal of this process is to create a working prototype that will demonstrate the technical feasibility of your idea. This is the moment when you can see how the real code will work and make the necessary changes . Here you will also get an idea of the development timeline .
Perhaps the most important thing to implement is the security of the smart contract . One day, your smart contract can handle billions of dollars, so it’s vital that it doesn’t have flaws. In the development of a smart contract , it is important to take into account such moments as re-treatment. Since smart contracts often call other smart contract functions, there is a possibility that another function may interrupt your smart contract execution. This was the reason for the famous DAO ETH hack.
Smart contract testing
This is certainly not the most exciting part of the development process, but the importance of testing smart contracts cannot be underestimated . Testing ensures that your smart contract works correctly and meets the requirements of your business. It should also catch any bugs before they are deployed to the blockchain so you don’t have to deal with issues after deployment.
Contract Deployment
Once you have tested your contract and made sure it is correct, you can deploy it on the blockchain network. This process involves passing code to a host , which creates an immutable record of your contract . When this is done , it will become available for execution to other nodes .
Once your smart contract is deployed, it cannot be modified. To supplement a smart contract, it is necessary to create and launch a new version of it, while the old version of the contract will still exist in the blockchain.
Advantages of smart contracts
Smart contracts are a powerful tool for automating business processes. They have many benefits including:
- Cost-Effective : This is the fastest and safest way to execute a contract. In some cases, they eliminate the need for middlemen , allowing for lower costs and faster processes.
- Transparency : Every transaction is recorded on the blockchain so you can see exactly what happened at any given time. You can also audit the contract to make sure it was executed correctly.
- Reliability : Smart contracts are secure because they run on a decentralized network without a single point of failure .
- Time Savings and Autonomy: Smart contracts help save time by eliminating the need for manual processes. They also give you more autonomy over your data and transactions.
- Secure storage and backup: smart contracts are stored on the blockchain , so they cannot be lost or stolen. This makes them a great option for storing sensitive information such as medical records and financial documents.
- Error or Fraud Prevention: Smart contracts make it harder for unscrupulous entities to manipulate data or commit fraud . They also reduce the risk of human error, which can lead to costly errors.
Limitations in the operation of smart contracts
- Management : Smart contracts are difficult to implement and manage. Once written to the blockchain, a smart contract cannot be changed – even if you only need to change one character in its code.
- Confidentiality : after being written to the blockchain, the smart contract can be seen by anyone. This means you won’t be able to use it to store sensitive information or keep your business plans private.
- Bugs : Like any other software, smart contracts are prone to bugs . If you make a mistake when writing the code , then after it is deployed on the blockchain , it will be impossible to correct it.
- Security : Smart contracts are not secure from cyber attacks. Like any other software, they can be hacked and used by attackers with the right tools. If a hacker manages to infiltrate your blockchain and find a way to bypass the established security measures, he can steal or manipulate information.
- Lack of legal regulation of smart contracts: The legal status of smart contracts is still in its infancy . In many countries, there is no legal definition of what a smart contract is and how it should be treated legally. This can cause problems when people try to enforce such contracts or challenge them in court .
- Difficulties with taxes and accounting: Accounting for smart contracts can also be difficult due to the lack of set rules .
Output
Smart contracts are an amazing technology that has the potential to revolutionize many industries . They can help streamline business processes, reduce costs, and make transactions more efficient. safe. HoweverAs with any new technology, there are some issues that need to be addressed before it can be widely adopted .
