Smart contracts – an innovative business system

7 min read
Smart contracts – an innovative business system
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In 1994, Nick Szabo, a lawyer and cryptocurrency pioneer, realized that a decentralized ledger could be used for smart-contract technology, otherwise known as self-executing contracts, blockchain contracts, or digital contracts.

In this format, contracts can be digitized, stored in the system, and controlled by a network of computers running the blockchain. Smart contracts are used to transfer money and receive products or services.

What are smart contracts?

Smart contracts help you exchange money, property, or shares for cryptocurrencies, while avoiding the need to use the services of intermediaries.

The best way to characterize a smart contract is to compare the technology with something familiar to every user. It’s about a vending machine. If we talk about documents, then the standard procedure for processing is as follows: you go to a lawyer or notary, pay them and wait for the specialist to prepare the document.

With the help of smart contracts, you simply send cryptocurrency, and in return you are guaranteed to receive the necessary document. Smart contracts regulate rules and penalties in the same way that a traditional contract does, and automatically guarantee that both parties meet these obligations.

Smart contracts
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When the smart contract algorithm is concluded, the condition, if everything is correct, the asset must pass from the seller to the buyer. If there is a discrepancy, the asset is immediately returned to the sender. At the same time, the decentralized ledger also stores and replicates the document, making it secure and immutable.

You can use smart contracts in all areas of business relationships that range from financial derivatives to insurance premiums, property, lien or loan agreements, financial services, legal processes and crowdfunding agreements.

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Smart contracts can be encoded on any blockchain, leading cryptocurrencies are obviously focused on working with smart contracts. But Ethereum is most commonly used as it gives unlimited processing possibilities. While a standard contract sets out the terms of the relationship (usually those enforceable by law), the smart contract enforces the relationship with the cryptographic code.

In other words, smart contracts are programmed actions that are performed exactly as they are configured by their creators.

How it works

It is worth noting that Bitcoin was the first to support basic smart contracts in the sense that the network could transfer digital assets from one person to another. The network of nodes only validates transactions if pre-programmed conditions have been met. But bitcoin is limited to the currency use case.

Smart contracts
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In contrast, Ethereum replaces the more restrictive bitcoin language (a scripting language that consists of about a hundred scripts) with one that allows developers to write their own programs.

Ethereum allows developers to create unique smart contracts or “autonomous agents” as outlined in the whitepaper. The language is “Turing-complete”, which means it supports a wider set of computational instructions.

The following functions are implemented in smart contracts:

  • “Multi-signature” accounts so that funds are only spent when the required percentage of people agree;
  • Manage agreements between users, such as when one buys insurance from another;
  • Working like a software library;
  • Store information about the application, such as domain registration information or membership records.

On the other hand, Ethereum allows developers to create their own, unique, smart contracts to define instructions. These smart contracts can be written using friendly programming languages ​​modeled on existing languages ​​such as JS and Python.

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Smart contracts live as bytecode in a decentralized database. This is the root of Ethereum’s innovation and disruptive potential. All network nodes executing code using Ethereum must come to the same result and come to a consensus to agree on the state of the next block.

Any user can deploy a smart contract in a decentralized database for a fee proportional to the size of the repository containing the code. Nodes wishing to use a smart contract must somehow indicate the result of their participation in the rest of the network.

Gas as a means of payment

The gas is what incentivizes nodes to participate in network and computing jobs to deploy a smart contract to a database or perform jobs corresponding to user interactions with existing contracts.

This not only motivates miners to compute jobs, but also encourages developers to deploy efficient code to optimize the use of deployed protocols for users. They provide an appropriate fee for transactions sent to the network. Because the EVM can execute code of arbitrary complexity, choosing free code based on transaction length is not always accurate.

How to write a smart contract

Solidity is Javascript, a verbose language designed specifically for writing smart contracts. The solidity compiler turns the code into EVM bytecode, which can then be sent to the ethereum network as a deployment transaction. Such deployments have larger transaction fees than smart contract interactions and must be paid by the contract owner.

Smart contracts
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A good example of a smart contract would be crowdfunding. Popular crowdfunding sites like Kickstarter and Gofundme aim to bring new products and missions to life, but crowdfunding systems often suffer from founders who fall short of expectations.

Worse yet, we’ve all heard stories of scammers presenting a visionary but technologically impossible product and proceeding to collect tens of thousands of dollars, only to soon abandon their mission and disappear with the money. This phenomenon represents a systematic failure and inefficiency caused by the transfer of all power over funding into the hands of one central actor in order to hold both donors and founders accountable.

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Smart contracts applied by Ethereum as described above can hold all parties who are involved in a contract agreement or transaction liable by following the process:

  1. Database collects money from donors and stores funding in an ownerless account;
  2. The funds are held by the founders until they provide evidence of progress that satisfies a sufficient proportion of donors, similar to how public companies are accountable to their shareholders;
  3. When investors agree to the progress, the funds become available to the developer;
  4. If the founders fail to meet expectations or bring the product to market, the funds are returned to the investors.

Finally, all four steps are done without a central authority such as Kickstarter or Gofundme. The technical side of the smart contract guarantees a system of security, decentralization, reputation and accountability that will expand and eventually revolutionize centralized applications in every industry.

Work concept and scope

The possibilities of Smart contracts are practically unlimited. They can:

  • Turn legal obligations into automated processes;
  • Ensure a high level of security;
  • Reduce dependency on trusted intermediaries;
  • Contribute to lower transaction costs.

A smart contract can formalize relationships between people, institutions, and the assets they own. The rules of transactions (agreements) of a smart contract define the conditions, rights and obligations to which the parties to the protocol or smart contract agree.

Smart contracts
Picture: futuristspeaker.com

It is often predetermined, and agreement is achieved by simple actions. This set of transaction rules is digitally formalized in a machine-readable code. These rights and obligations, set out in a smart contract, can now be automatically exercised by a computer or network of computers, once the parties have reached an agreement and fulfilled the terms of the agreement.

Conclusions

The concept of a smart contract is not new, the benefits of using them are almost unlimited. However, Blockchain seems to be the catalyst for the implementation of smart contracts. The most primitive form of smart contract is the Vending Machine.

The transaction rules are programmed into the machine. You select a product by selecting the number assigned to the product, enter coins, and receive the product. If the amount you entered matches the value of the item, then the machine is programmed to throw out the product, and if you enter too much money, it will also throw out the change.

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If you didn’t put in enough money, or if the machine ran out of stock, you’ll get your money back. Not only have automated vending machines reduced transaction costs by making human vendors obsolete, but they have also expanded the service by offering 24/7 availability instead of limited kiosk hours. Smart contracts are certainly a revolutionary solution that has become available thanks to blockchain technologies and the digital revolution.

Interesting facts about cryptocurrency

  • In the Bitcoin and Ethereum networks, the execution of the conditions of smart contracts occurs in different ways;
  • Using smart contracts, you get the opportunity to securely conclude transactions without the need for the services of brokers, lawyers or other intermediaries;
  • The use of smart contracts ensures that your documents are securely encrypted and stored in a distributed ledger.
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