One of the key technology innovations of second generation blockchains has been the development of what are called “smart contracts.”
You hear about smart contracts just about everywhere in the crypto space as they are at the center of almost everything blockchain.
In this article, let’s explore the sophisticated world of smart contracts and we will touch on what smart contracts are, what they can do and what makes them among the most important technological advances of the 2020s.
What Are Smart Contracts?
Contracts have been the standard way to formalize relationships in our society for millennia.
Whether you are buying or selling a home, a piece of land, digital assets, a car or you want to check into an inn, you will be required to enter into a legally binding agreement with the other party. In the traditional setting, a third party is usually a lawyer, a court or a bank and will ensure that both parties are obligated to the terms and conditions of the agreement — so this is where smart contracts come into play.
Smart contracts are computer code that is stored inside of a blockchain which encodes contractual agreements — they are self-executing with the terms of the agreement or operation directly written into lines of code stored and executed on the blockchain computer. And once it’s been created, no one can alter it.
To put it another way, we could say that smart contracts are digitized terms and conditions of crypto-based transactions — the main difference between them and traditional contracts is that unlike the old school way of doing business, smart contracts confirm fulfillment automatically and execute the contract’s terms instinctively.
The blockchain guarantees a more transparent and secure performance and execution of the contract’s terms without the need of a third party.
Types Of Smart Contracts
1. Smart Legal Contracts
This is the most common type of smart contract — parties in the contract are held accountable to keep their end of the agreement and failure to do so can trigger legal action against them.
2. Decentralized Autonomous Organizations (DAOs)
These blockchain communities are defined by a set of rules that are coded via smart contracts the participants are bound to specific rules and their enforcement is executed via smart contracts that work together to watch over activities in the community
3. Application Logic Contracts (ALCs)
These contracts contain application-based codes linked with other blockchain contracts — they facilitate communication across numerous devices such as integrating blockchain technology with the Internet of Things (IoT).
- Immutable – This means they cannot change once the smart contract is published on the blockchain. The downside of this you might be thinking is that if there is a bug or the code is inefficient, then it will be a bug and it will be inefficient forever. If you wanted to, you could just create a new smart contract and tell people not to use the old one.
- Distributed – This means there are no discrepancies – these smart contracts are an agreement between a few parties online that can be automatically executed if certain conditions are met. Smart contracts are designed to remove human error and issues — in fact you couldn’t hire a lawyer even if you wanted to because of the code, it is on a bunch of computers around the world and anyone, if they wanted to, could see your smart contract and how you participated with it.
When put side to side with a traditional contracts, we could say that the most significant challenge you could encounter is (1) the reduced or the complete lack of flexibility of the smart contracts terms and conditions and then (2) there is the difficulty and the ability to read the contracts by anyone who lacks specific background knowledge and qualifications. But thankfully, anyone having trouble can seek the mediation of experienced blockchain specific lawyers.
Tools And Resources For Finding Smart Contracts
It is now clear that smart contracts are central in the crypto space and being able to read them is a skill. Smart contracts details such as data on transactions, blocks wallet addresses and more are found on blockchain explorers like Etherscan.
Etherscan is a block explorer for the Ethereum network that enables users to search through transactions, block wallet addresses, smart contracts and other on-chain data. This free to use tool is one of the most popular Ethereum blockchain explorers and using it can help you understand how you interact with the blockchain, smart contracts and Dapps.
This knowledge can also help you stay safe and spot suspicious behavior. The information you will see will depend on what you are looking at but most of it will include associated transactions addresses, time stamps and amounts.
We are still in the early days of smart contracts and even though their users do not need the intervention of intermediaries — your duty as a user is to scrutinize smart contracts to make sure the code is written correctly.
Now like every other technology in its early days, there may still be security issues and bug exploits which have led to the loss of digital assets on a few rare occasions — so as we wait for those few issues to be resolved with time we always recommend that you do your own research.
Frequently Asked Questions (FAQs)
It is a program that accomplishes very detailed actions based on the conditions written in the code by the programmer — these mostly used in blockchain to automatically complete agreements.
Preparing, formulating and drafting a traditional contract normally takes anywhere between one to several days or even weeks. However it’s the opposite for a smart contract — the process can be instantaneous as long as there is a ready-made smart contract platform.
If we’re talking about execution and remittance, the parties involved in a traditional contract must make payment of the amount due in time with most processes requiring manual effort. In smart contracts, the process is executed automatically as soon as certain preset conditions are met.
Absolutely. Smart contracts are written by humans — specifically programmers — and the coding errors can be unintentional and/or malicious.