A smart contract is a computer program that controls the exchange of assets or digital currencies between parties if meet the pre-set conditions. Not only does the agreement specify the rules, but it also automatically fulfills the obligations.
A smart contract is an interactive contract that lines the terms of the agreement between the buyer and seller. The codes and agreements are present in a distributed, decentralized blockchain network. The code evaluates and tests the performance as well as track the transactions, which are permanent.
Smart contracts allow for the implementation without the need for a central authority and legal system. They eliminated the need for external enforcement mechanism in trusty trades and agreements between the disparate and anonymous parties.
Smart Contract and Blockchain Technology:
The idea of smart contracts is based mainly on the idea of blockchain technology.
A blockchain is a network of decentralized data that links through cryptography in a growing list of records. A single central locus such as a conventional database does not include a blockchain network. All computers in the network share the stored data in the blockchain. The network is less vulnerable to subsequent failures or attacks.
Moreover, we cannot alter the record on one computer in a blockchain without changing the same record on other network machines. Blockchain transactions are grouped into blocks that are linked into a chain. Only after the previous block completion, a new block created. The blocks come in linear order and each block contains the previous block’s cryptography hash.
Widespread consideration is that the technology of blockchain is the main factor in the foundation of Bitcoin. So, it has developed itself well beyond the virtual currency.
Certain people believe that the concept of smart contracts appeared together with blockchain. But, this concept is not true. In 1994, computer science and law major Nick Szabo proposed the idea of a smart contract.
He argues that these contracts facilitate every contract process through the use of protocols and user interfaces. In his paper, ‘Formalizing and securing relations on public networks’. This provides a new digital contract method with far more features than conventional pen & paper contracts, which can cut transaction costs by smart contracts.
In 2013, Ethereum’s co-founder, Vitalik Buterin, uploaded to his blog the white paper ‘Ethereum’, “Last Smart Contracts and Decentralized Application Platform”. Later, Vitaik implemented and opened the widespread use of smart contracts. He also applied the idea of smart contracts within the Ethereum blockchain system.
Current smart contracts in blockchain look like scripts implementing conventional pen & paper contracts on the code line.
The use of smart contracts permits the complete unknown contracting of two parts. It is because, if meet certain conditions, the contract does not enter into force. Therefore, one of the principal features of these contracts is that it facilitates contract signing and fulfillment without intermediaries.
We witness the implementation of these contracts on many blockchain platforms. Blockchains have many witnesses, their results come from their inputs and the ideal environment.
Types of smart contract services:
Assuming the importance and wider scope, smart contracts can be classified into the following categories.
1. Intelligent legal agreements:
All contracts, if not most, are legally compulsory. A smart legitimate contact includes strict legal recourse. There is insufficient support for smart and automatic contracts if parties did not fulfill their end to the deal without going into many technicalities. Their legal status is not clear in the current legal framework in various countries and contexts. Once legislation is adopted, smart contracts can be entered into simplifying processes that are currently under strict regulatory control. Such as financial and property transactions, administration subsidies, international trading, etc.
2. Decentralized Autonomous Organizations:
Decentralized Autonomous Organizations (DAO), identified as blockchain communities. The community can be defined by several rules that have been reached and placed in code via smart contracts. Each action of each participant would be governed by these regulations, to enforce and recourse, if the program breaks. Many smart contracts form these rules and work in conjunction with police and participants.
In May 2016, Ethereum participants created a DAO called the DAO Genesis. The intention of the community was to serve as a platform for public financing and risk capital. They managed to raise an amazing 150 million dollars in a surprisingly short time. However, hackers found faults and managed to steal Ethers from crowdfunding investors for a value of approximately $50 million. This hack and its repercussions resulted in a two-fold Ethereum blockchain.
3. Application logic contracts (ALCs):
Smart contracts include an app-specific code. This code works in conjunction with other intelligent block chain contracts and programs.
They help communication between devices (within the IoT domain) and validate communication between them.
ALCs are a key component of every intelligent multifunctional contract and work. Most of the time within a management program.
How smart contract work:
Most of the smart contracts are based on languages of programming. They can provide a certain amount of conditions that meet or allow collateral loans without banks. In brief, smart contracts under certain conditions can perform specific actions.
Sadly, Ethereum smart contracts are not consistent with conventional languages of programming. Instead, Smart contracts may be used to define a logical contract function using specific languages such as Solidity and Vyper. This logical contract function is then used by a compiler to turn the bytecodes into blockchains and distribute them.
Smart contracts work in the following way.
- Solidity will carry out what you want to do with Smart Contracts.
- Compile and generate bytecode for distribution over the network.
- The transaction includes the byte code and the miner mines the block. At the same time, it records the transactions on the blockchain network.
- A bytecode is generated by the User to call and transmit the smart contract code to the blockchain network, which is defined by the distributed smart contract code.
- The miner operates the Bytecode on the EVM(Ethereum Virtual Machine) by the distributed smart contract code. At this time, gas charges are calculated, and the results are reflected in blockchain status, provided that the results are valid.
If we use bytecode for a logical contract function, it transfers something called a binary application interface (ABI). An interested party intending to use the agreement does not directly interact with the computer. Human-friendly interfaces are a must for constructing these. Because they interact with input and output devices like keys, mouse, and monitors. This ABI makes it easier to build this human-friendly interface.
The Web3.js library provides smart contract functions for the use of web browsers to interact with smart contracts. Swift and Kotlin implementations can be used in mobile environments.
The life cycle of smart contract:
The life cycle of smart contract development is a process that develops and implements a related market securely. We must consider the following steps to develop a secure contract, which also meets the full and perfect logic of business.
- Understand the smart contract application case.
- Create a basic smart contract architecture or flowchart of how functions interact.
- Start developing using any IDE or truffle development tools, remix each function correctly.
- After completing the development, smart contracts will be tested on a test-net or a private block shake.
- Record the entire transaction during testing on test-net.
- Analyze the results of all transactions with real case use and smart contract business logic.
- Unit testing is the next step in the cycle of smart contract development. There are several units and integration testing frameworks that are in use to test smart contracts. Example: Framework of truffles.
- After the unit testing, smart contract Author should go for the third party Audit of the intellectual contract.
- Finally, bug bounty programs can also make smart contracts very efficient.
Things that can make smart contract special:
Using smart contracts is the need of the hour but why it becomes so special and popular needs to be discussed here. The following characteristics are worth mentioning.
Smart contracts are fulfilled in absolute detail with terms and conditions, which participating parties in the agreement also verify. This removes the opportunity of dispute and problems at the subsequent stages. As the conditions are only carefully checked and implemented when they are all agreed upon by all participants. This feature of intelligent contracts allows the parties involved to make transactions more transparent.
Besides, the need for contract detailing precision keeps all data open to all, who finally solve anything related to the problem of malfunction. Thus, limits the efficiency lost in communication gap with the aid of intelligent contracts.
2. Time saving:
Smart contracts are passed through the internet, as they are only software code pieces. The speed at which transactions are carried out using intelligent codes is therefore far too quick. Compared to all conventional business processes, smart contracts can save hours or even days. Also, eliminates manual participation delays.
3. Precision and Accuracy:
A smart contract is explicitly coded in detail. They require all the terms and conditions to put them in place before the final implementation. Any condition left out of the contract could lead to a mistake in the implementation. Therefore, all conditions are set out in detail during the creation of intelligent contracts. This means that the smart contract is a complete agreement. Automatic executions help in perfect performance of everything in process.
4.Safety and effectiveness:
The safest options in current times for data encrypted technology are smart contracts with automated coding capabilities. The level of protection involved enables them to be secure to be used for critical processes because they correspond to the highest safety standards. Besides, because smart contracts are so accurate and secure, their efficiency level in transactions is far too high and generates greater value.
5. Be your boss:
You’re the one who agrees. As it needs no broker, lawyer, or any other intermediaries to confirm it. This also eliminates the risk of manipulation by a third party. Because one or more individuals manages the automatic execution, possibly biased, who may be mistaken.
Since smart contracts contain computer-coded documents, paper use is almost negligible in all processes. This saves costs on the one side while helping companies globally to save their share of contractual paper use and to promote their contribution to society on the other hand.
7. Cost & Risk reduction:
The processing costs and conventional contract costs are at a minimum by automating tasks with code-based Digital contracts. There is minimum human intervention in smart contracts. So, it eliminates the risk of fraud by the decentralized procedures.
Smart contracts eliminate the need of all lawyers, witnesses, and intermediaries. Also, as stated earlier, intelligent contracts save money because paper-based documents do not participate in any process.
Limitations/Drawbacks of smart contract:
Smart contracts have many benefits associated with them. However, some disadvantages are also there.
- Smart contracts work with weak legal regulations.
- The need to deal with speed and scalability in blockchain technology; transaction processing
- Unable to adjust smart contracts;
- High programming dependence and bug exposure.
There can be no limit to the potential of smart contracts. Small regular agreements and for administration and enterprise contracts use smart contracts. You can track your purchase in the supply chain, which increases confidence.
Third parties, such as lawyers, administrative bodies, are making a hole in our pockets as agreements. Smart contracts save this money by eliminating the necessity for those intermediaries. All we have to do is to check the code before execution. Smart contracts offer us the opportunity to simplify and automate our routine transactions and processes.
Interfaces, business rules, and data are the foundation of intelligent contracts. Updated smart contracts correctly address any problems of compatibility with operating systems and to meet the evolving technologies. Although intelligent contracts continue to develop, they may face certain attacks on vulnerability. To make smart contracts a part of everyday lives, we must update cybersecurity practices and platforms for the creation of smart contracts.
These aren’t all the smart contracts’ advantages and disadvantages. However, if you need the work to be developed and improved still, smart contracts are suitable to be a great substitute for standard contracts.