A smart contract is a program stored on a blockchain that executes automatically without intermediaries when predetermined conditions are met. Its main goal is to simplify business trade between anonymous parties and identified parties eliminating third parties. It also scales down on formality and costs associated with traditional methods but does not necessarily compromise authenticity and credibility. Although all executed transactions in smart contracts are traceable but are also irreversible. 

 

Smart contract real use cases include financial purposes like trading, investing, lending, and borrowing. But with the growth of decentralized finance (DeFi), it is also now used in gaming, healthcare, real estate, and to configure entire corporate structures. But you might be wondering about the origin of these contracts? Let’s go back to the time when it was first introduced and the person behind it.

 

In 1994, Nick Szabo, an American computer scientist who happens to be the inventor of the digital currency “Bit Gold” in 1988 first coined the term. He used it to pertain to “a set of promises, specified in digital form, including protocols within which the parties perform on these promises”. According to Investopedia, Szabo’s proposal included the execution of a contract for synthetic assets, such as derivatives and bonds. He stated:

 

“These new securities are formed by combining securities (such as bonds) and derivatives (options and futures) in a wide variety of ways. Very complex term structures for payments can now be built into standardized contracts and traded with low transaction costs, due to computerized analysis of these complex term structures.”

 

Developers are the ones responsible for setting the logic and testing to ensure that it works as intended. Then it will be handed to the security team for audit where it undergoes an extensive methodical examination and analysis. Through this process, smart contracts are checked to discover errors, issues, and security vulnerabilities in the code in order to suggest improvements and ways to fix them. Once approved, it will be deployed in a blockchain or any distributor ledger infrastructure. 

 

For smart contracts to be executed, it is connected by oracles to the outside world of blockchain. It works more like a pair of eyes and ears for smart contracts. Currently, there’s a long list of smart contract platforms for developers to choose from but Ethereum is the “most favorite network” among these platforms. According to a report by Yahoo, the network recorded a peak of 2.5 million deployed smart contracts. You might also want to consider other popular smart contract platforms in this list.

 

  1. Polkadot
  2. Solana
  3. Tezos
  4. Algorand
  5. Corda
  6. NEM
  7. Hyperledger Fabric
  8. Waves

 

What are the benefits of using smart contracts? Since it does not require intermediaries to verify their authenticity, participants save money and time for transactions. But there are also challenges surrounding smart contracts. What are these? Since blockchain, the underlying technology behind smart contracts is still in its infancy, smart contracts are vulnerable to hacking and other cyberattacks. The most known of these were the Decentralized Autonomous Organization (DAO) attack and the Parity Wallet hack. At times, intrinsic errors also occur and result in unintended smart contract behavior. Changing smart contract processes are almost impossible and could be time-consuming and expensive. 

 

Despite these vulnerabilities, smart contracts are now fast becoming a part of businesses in the real world as the benefits outweigh the risks. Better than traditional contracts, the continued growth in its adoption in the real world is already out of question. But are there ways to mitigate their vulnerabilities?