Smart contracts in blockchain technologies. Are they really that smart?
Blockchain technologies are not something new and during the last decade, they have proven that they are going to stay here for a while. Most people look at these technologies as something that is going to change money, but the real power of this tech is in pieces of code that can live and get executed by certain conditions on the blockchain.
History of smart contracts
Even though today smart contracts are mostly used in blockchain technologies their first mention was way earlier. First proposition of smart contracts came from the computer scientist and cryptographer Nick Szabo in the early 1990s. He was the first man to build the foundation of smart contracts but unfortunately, at that time there were no technologies available to support the idea. In1998 Nick Szabo tried to develop some variation of decentralized digital currency naming it bit gold (sounds familiar?) but this was never implemented.
For a long time, there was no real solution for digital currency, not until 2008 and the publication of white paper by someone under the pseudonym Satoshi Nakamoto as well as the appearance of Bitcoin. Even to this day, it is not known who is really behind the pseudonym. There is a lot of speculation about who this person or group of people can be. Nick Szabo, because of his previous similar projects and deep involvement in the decentralized currency, before the appearance of bitcoin, is thought to stand behind this pseudonym.
The appearance of Bitcoin brought the first real digital decentralized network in variation and the idea of blockchain. But bitcoin has its limitations, it has provided solutions for digital currency and decentralized networks but nothing beyond that. There was no possibility to implement or run something else on the bitcoin blockchain than transactions.
After the appearance of bitcoin, a lot of other blockchain technologies started popping up but they didn’t offer more or anything different than bitcoin. The first real big change in the field of blockchain which pushed it to a higher level happened in 2013 with the appearance of a white paper for Ethereum by Vitalik Buterin. Vitalik in his paper described what decentralized applications should look like and he expanded the idea of blockchain not being used only for money and payments but also for the possibility of executing smart contracts.
Today there are a lot of platforms that offer the use of smart contracts on their blockchains but Ethereum remains as the most used and dominant in that field.
So what are smart contracts and how do they work?
According to Nick Szabo, by definition, a smart contract is an agreement between two people or entities in the form of computer code programmed to execute automatically. In blockchain technologies, smart contracts are executed similarly as transactions, which means that once they are distributed on the network they can’t be changed anymore. The exec flow is explained in the next few steps:
1. A user initiates a transaction from their blockchain wallet.
2. The transaction arrives at the distributed database, where the identity is confirmed.
3. The transaction, which may be a transfer of funds, is approved.
4. The transaction includes the code that defines what type of transaction is to be executed.
5. The transactions are added as a block within the blockchain.
6. Any change in contract status follows the same process to be updated.
We already mention Ethereum as the most popular working platform for the execution of smart contracts but there is a few more worthy of mention :
Hyperledger: an open-source system developed by Linux Foundation that is not a cryptocurrency, but a flexible platform for which smart contracts can be developed.
Counterparty: this platform incorporates data into Bitcoin transactions, i.e. it uses the cryptocurrency's blockchain and allows contracts to be developed on it.
Polkadot: it is an alternative to blockchain and is famous for its ability to host para chains, and chains within chains, allowing more transactions than usual.
Where smart contracts are used?
Most commonly smart contracts are used for finances but they can be used in different fields of business, such as:
Insurance
Health
Elections
Human resourcess
Intellectual property
Trade
Records
Mortgages
Pros and Cons of using smart contracts.
There are a lot of benefits to using smart contracts, but like everything else, it also has some flaws. Here are some of the pros of using smart contracts:
Independence: the participants make the arrangements themselves, i.e. the involvement of intermediaries can be dispensed with.
Reliability: the contract is securely stored in a distributed network and is virtually impossible to alter or forge.
Security: being in a distributed network, the contract is duplicated in all nodes of the network and cannot be lost.
Savings: by cutting out intermediaries and commissions there is a reduction in costs for all parties involved.
Accuracy: this type of contract reduces to zero the possibility of errors in the terms or processing.
Sustainability: contracts eliminate the use of paper in offices, notaries, and registers, and pollution is reduced as a result of less travel.
As we already mentioned not all is so bright in the world of smart contracts, there are also some disadvantages:
Lack of regulation – The international legal field lacks the concepts of “blockchain,” “smart contract,” and “cryptocurrency.”
The difficulty of implementation – Integrating smart contracts with elements of the real world often takes a lot of time, money, and effort.
Impossibility of changing a smart contract – Paradoxically, one of the main pros of smart contracts can also be seen as a con. If the parties reach a more advantageous agreement or new factors arise, they will not be able to change the contract. For this reason, options for supplementary agreements need to be implemented as new blockchain platforms are developed.
What can we expect in the future?
Even if smart contracts look very promising in the world of business, their future is still unsure. There are a lot of legal issues and regulations that are stopping this technology from being fully accepted in today's business world. For now, we can only say that time will tell what the future brings us related to smart contracts.