All About Smart Contracts

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What are smart contracts

A smart contract is a program code that is written on a blockchain. A smart contract is a certain set of programs necessary to perform specific, pre-planned functions. All these programs are written on the blockchain. The program itself controls the execution of all its elements, which are provided for in it. When drafting a smart contract, measures may be envisaged to ensure the fulfillment of the terms of the contract, as well as punishment in case of non-fulfillment of its provisions.

All conditions of a smart contract are interpreted unambiguously and cannot be changed. This distinguishes a smart contract from a simple classic contract, which can be interpreted as you wish in contentious cases. The final interpretation of the contract in the event of a dispute is usually given only by the court.

Often the code of a smart contract is publicly available and anyone can check it. All information contained in the smart contract cannot be changed or falsified, just as data cannot be entered retroactively into the smart contract. All information regarding the smart contract is on the blockchain and it is transparent. Anyone can check the execution of a smart contract, as well as all information regarding it.

Smart contract features

  • A smart contract is a source code, a program that is written and stored on the blockchain.
  • All data regarding the execution of a smart contract is also stored on the blockchain and it is transparent. Anyone can check this data.
  • Information on the blockchain cannot be changed. A smart contract cannot be falsified, just as data cannot be entered retroactively.
  • A smart contract may provide for measures to ensure its implementation.
  •  In case of non-fulfillment of the terms of the smart contract, penalties may automatically be provided. For example, a smart contract may provide for the payment of a penalty in case of delay in payment and penalties from the wrong party will be charged automatically.
  • The terms of a smart contract cannot be changed only if the smart contract itself does not foresee the possibility of changing its terms.
  • The terms of a smart contract cannot be interpreted in two ways, as is often the case in ordinary contracts. A smart contract is a program and it involves an unambiguous interpretation of all its provisions.
  • Smart contracts can be used in various fields of human activity. It all depends on the program itself and on the purpose for which it was written.
  • The execution of the terms of the smart contract is controlled by the program itself.
  • A smart contract excludes the participation of third parties and intermediaries in fulfilling the terms of the contract. Everything is automated. The human factor is minimized and limited only by writing the source code for a smart contract.

The emergence of smart contracts

The idea of ​​the emergence of smart contracts appeared in 1994, at the same time the basic principles of their implementation were described. However, smart contracts at that time could not be implemented due to the lack of appropriate technologies. The first opportunity to implement smart contracts appeared in 2009 with the advent of the Bitcoin blockchain.

However, the Bitcoin blockchain itself was intended for other purposes. First of all, the Bitcoin blockchain allowed payments. It was possible to draw up the simplest smart contracts on it, as well as transmit any information along with the payment. An example of a simple smart contract on the Bitcoin blockchain is multi-signature. Now, many Bitcoin wallets use multi-signature.

Full implementation of smart contracts became possible only after the advent of the Ethereum blockchain. The Ethereum blockchain made it possible to implement the idea of ​​smart contracts in more detail, allowing you to create various smart contracts of any complexity on the blockchain, store them on the blockchain and move them.

Thus, a full-fledged opportunity to create smart contracts appeared only with the implementation of the Ethereum blockchain in 2015. But even with the advent of the blockchain itself, smart contracts did not immediately find application. They started talking about the full use of smart contracts only in 2017, when they began to create tokens on the Ethereum blockchain for ICOs.

Smart contracts made it possible to create any tokens. Thanks to smart contracts, it was possible to freeze the sale of tokens, for example, until the end of the ICO or stipulate that if the ICO does not collect a Soft Cap, then the money will be sent back to investors in their wallets. Also, smart contracts often stipulate that team tokens are frozen for a certain time until the implementation of project ideas.

ICOs are a very narrow field of application for smart contracts. Smart contracts can be used in various industries and for the implementation of a variety of functions. They can be used in the financial, banking sector, in the implementation of sales or for the delivery of goods. For example, a smart contract can provide that the seller’s money will be available (unfrozen) in the event that he delivers the goods to the buyer and he will accept it. Thanks to smart contracts, you can track the delivery of goods.

Now a new direction of HYIPs has appeared – HYIPs on smart contracts. The main investment conditions are spelled out in a smart contract. Investors see how much money has been invested, how much has been paid. Thus, thanks to smart contracts, investment has become completely transparent.

Advantages and disadvantages of smart contracts

Now many industries are exploring the possibilities of using smart contracts for their needs. First of all, smart contracts are of interest to the financial sector, the banking sector, the insurance industry, and logistics. Smart contracting options are being considered for the automotive and aviation industries. Smart contracts have already been widely used in casinos and sweepstakes.

When applying smart contracts, it captivates their transparency and openness. Although it is transparency that scares away the use of smart contracts in the banking sector. After all, we all know about bank secrecy and confidentiality of deposits. And as you know, all payments on the blockchain are open. Therefore, the banking sector is still considering the use of smart contracts in a very limited form.

Thus, the transparency and accessibility of smart contracts can be both their advantage and disadvantage.

In general, many of the advantages of smart contracts at the same time may be their disadvantages. For example, when writing smart contracts, all conditions for their execution are specified unambiguously, usually they cannot be changed unless such a change is provided for by the smart contract. In case of violation of the smart contract, a punishment is prescribed, which also cannot be changed. In life, a violation of obligations often arises for some objective reasons. For example, a person could not pay on time, as he fell ill. In such cases, if there are objective reasons, the parties usually go towards each other and change the terms of the contract.

It is impossible to change a smart contract, if it is not provided for by it. In addition, it is impossible to spell out absolutely all cases in a smart contract in which its change is possible. Life often involves flexible solutions, and a smart contract is a program in which there is no flexibility.

On the one hand, the accuracy of the execution of a smart contract is its plus, on the other hand, the same accuracy becomes a disadvantage of a smart contract, since it lacks flexibility.

There are still purely technical flaws in smart contracts, as well as the notorious “human factor”. After all, smart contracts are written by people. A person may be mistaken. As a result, the smart contract will not be executed properly, that is, not as planned.

The technical disadvantages of smart contracts include the bandwidth problems of the Ethereum blockchain. The Ethereum blockchain is not able to withstand even the number of smart contracts that are currently located on it. Continuously network outages occur. And if the contract is complex, consisting of many elements and control points. The execution of each clause of the contract must be confirmed by the miner. It takes time and money. After all, the miner will not work for free.

Now there are more advanced blockchains with huge bandwidth, which are able to store and move smart contracts of any complexity in the shortest possible time. Thus, the blockchain does not stand still, it is developing, becoming more advanced, faster with higher bandwidth. New mining algorithms appear or mining is abandoned altogether.

It is possible that in the near future all existing problems of smart contracts will be resolved. They will become more complex, flexible, perfect. It is likely that closed blockchains will appear to transmit confidential information that can be used by the financial and banking sectors, as well as everyone who needs to transfer sensitive information.

The various possibilities of using smart contracts are being actively studied and the blockchain industry is developing and improving very quickly.

How smart contracts work

A smart contract is a program all the execution elements of which are prescribed by its developer. That is why the creator of the smart contract plays an important role, because the execution depends on how he writes it.

If the developer of the smart contract makes a mistake and writes the wrong code, the smart contract will not work correctly, not as it was originally intended. That is why it is very important who makes smart contracts.

Everywhere, smart contracts began to be applied only in 2017, so there are very few specialists who can correctly write smart contracts. In fact, they are not. Now only the simplest smart contracts are being created. Typically, smart contracts are created for tokens during the ICO, and almost all smart contracts have certain characteristics and features. That is, existing smart contracts are very often written according to the same template.

And even despite the template nature of most smart contracts, often hackers find vulnerabilities in such smart contracts and steal tokens from user wallets or exchanges.

Therefore, it is very important that the developed smart contract passes an independent audit. So that the competent person can confirm that the smart contract is safe. Again, at the moment, the problem is that there are very few competent specialists who could check the smart contract for security. It is not uncommon for ICOs to independently audit their smart contracts with two or even three independent specialists. In addition, almost all ICOs publish their smart contracts in the public domain and anyone can check the smart contract for vulnerabilities.

But even such measures do not always save smart contracts and ICO tokens turn out to be hacked and stolen from the ICO itself and from the users who bought them. And as mentioned earlier, smart contracts that regulate ICO tokens are quite simple and template.

More sophisticated smart contracts require more experience and skill.

The principle of operation of the blockchain and smart contracts

Most smart contracts are created on the Ethereum blockchain. This blockchain was specifically created to store smart contracts, as well as their movement. Any action regarding the execution of a smart contract must be confirmed by the miner. Thus, the miner fixes the fact of fulfillment of the provisions of the smart contract or its movement (transfer to another person). For committing their actions, the miner receives a commission.

The Ethereum blockchain has limited bandwidth and it is not able to simultaneously service a large number of smart contracts. Examples of bandwidth problems are most clearly seen during large ICOs and token distribution. Often, it takes several days for investors to pay and distribute tokens.

The game “Crypto-seals” showed more clearly about the existing problems with the Ethereum blockchain, during which the Ethereum blockchain stood up for almost a week and the further movement of tokens on it and the movement of ETH became virtually impossible.

Now blockchains have begun to appear with much greater bandwidth and lower commissions, which can also contain smart contracts. One such blockchain is EOS. Thus, developers want to solve the problem with the bandwidth of blockchains and give the green light to the development of more advanced smart contracts, which consist of many points and have a high degree of complexity.

Where is the smart contract

Unlike traditional contracts, for the conclusion of which two or more parties are required, smart contracts are created on the blockchain.

On the blockchains of some cryptocurrencies, the most famous of which is Ethereum, it is possible to add a smart contract. The developer writes the code for the smart contract, then adds it to the blockchain.

Parties to a smart contract are the parties to it. For example, when buying tokens, you become a party to a smart contract and agree to the conditions that its developer has specified in the smart contract. If you do not agree with the terms of the smart contract, you simply do not buy a token, and do not become a party to the smart contract.

The same thing happens if you invest in HYIPs on smart contracts. If you agree to the terms of the investment, you are depositing money from your hype account. Your account number is recorded in the smart contract. After that, you become a party to the smart contract and the profit from the smart contract is withdrawn to the account from which you made the deposit.

How to use a smart contract

Ways to use a smart contract depend on what is written in the contract itself. Usually, the site that developed this smart contract is given instructions for its use. So, for example, the main investment conditions are indicated on the project website during the ICO. How many tokens will be issued, whether they are burned, what happens if the Soft cap is not collected, how to buy tokens, how to add them to the wallet later.

Similar instructions are given in cryptocurrency hyps on smart contracts. There, investors are explained all the conditions of investment, their profit, how it will be paid. Is it necessary to order profit by transferring 0 ETH from the smart wallet to the smart contract wallet, or is the profit paid automatically.

As soon as you take an action regarding a smart contract, you automatically become a party to it. So, for example, you can buy a token or invest in a hype on a smart contract. Once you do this, you become a party to the smart contract and must abide by its terms. Therefore, before committing an action, you should familiarize yourself with what a smart contract offers you and what conditions are in it.

 Remember, a smart contract cannot usually be changed. Therefore, before participating in the smart contract itself, you need to carefully study everything in order to have an idea of ​​what the use of this smart contract will give you.

 

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