Smart Contract Definitions
- To put it simply, smart contracts are digital contracts that automatically process transactions when each of the encoded terms of the agreement is met by the transacting parties.
2. A smart contract is a computer program or a transaction protocol that is intended to automatically execute, control, or document legally relevant events and actions according to the terms of a contract or an agreement. The objectives of smart contracts are the reduction of need in trusted intermediates, arbitrations, and enforcement costs, fraud losses, as well as the reduction of malicious and accidental exceptions. Smart contracts could bring many efficiencies by serving as intelligent, automated, intermediaries for individuals who require them. Acting as an automated travel agent, these smart contracts would utilize data oracles to source a range of relevant services. Not only that, they could hold funds in escrow and only release them if services are properly provided.
3. Smart contracts are lines of code that are stored on a blockchain and automatically execute when predetermined terms and conditions are met. At the most basic level, they are programs that run as they’ve been set up to run by the people who developed them. It is an agreement between two people in the form of computer code. They run on the blockchain, so they are stored on a public database and cannot be changed. The transactions that happen in a smart contract are processed by the blockchain, which means they can be sent automatically without a third party.
Why Do We Need Smart Contracts?
Now that you understand the basic definition of a smart contract, the first question that must have come to your mind is, why do we even need a smart contract.
To understand that, consider that you are buying a property for which you need to request a mortgage loan from your bank. Funds approvals and deposit is a multi-step process that involves many parties and lots of regulatory paperwork. You will have to fill in your personal information, contact all the intermediaries involved in the transaction, get signatures and so on. This not only consumes a tremendous amount of time but also adds up to the total cost considerably. And all of this because there is a lack of trust between the transacting parties.
Fast forward to the future when smart contracts are mainstream, and you are planning again to buy a property by taking a loan from a bank. You will be able to verify your identity using your digital identity stored on the blockchain. From the loan approval to the transfer of ownership, every successful transaction will be transacted in the matter of minutes and recorded on the blockchain.
This is how smart contracts eliminate the need for trust and make transactions faster and more secure.
What do smart contracts do?
The easiest way to explain what a smart contract does is through an example. If you’ve ever bought a car at a dealership, you know there are several steps and it can be a frustrating process. If can’t pay for the car outright, you’ll have to obtain financing. This will require a credit check and you’ll have to fill out several forms with your personal information to verify your identity. Along the way, you’ll have to interact with several different people, including the salesperson, finance broker, and lender. To compensate for their work, various commissions and fees are added to the base price of the car. What smart contracts on blockchain can do is streamline this complex process that involves several intermediaries because of a lack of trust among participants in the transaction. With your identity stored on a blockchain, lenders can quickly make a decision about credit. Then, a smart contract would be created between your bank, the dealer, and the lender so that once the funds have been released to the dealer, the lender will hold the car’s title and repayment will be initiated based on the agreed terms. The transfer of ownership would be automatic as the transaction gets recorded to a blockchain, is shared among the participants, and can be checked at any time.
What are the benefits of smart contracts?
The benefits of smart contracts go hand-in-hand with blockchain.
- Speed and accuracy: Smart contracts are digital and automated, so you won’t have to spend time processing paperwork or reconciling and correcting the errors that are often written into documents that have been filled manually. Computer code is also more exact than the legalese that traditional contracts are written in.
- Trust: Smart contracts automatically execute transactions following predetermined rules, and the encrypted records of those transactions are shared across participants. Thus, nobody has to question whether information has been altered for personal benefit.
- Security: Blockchain transaction records are encrypted, and that makes them very hard to hack. Because each individual record is connected to previous and subsequent records on a distributed ledger, the whole chain would need to be altered to change a single record.
- Savings: Smart contracts remove the need for intermediaries because participants can trust the visible data and the technology to properly execute the transaction. There is no need for an extra person to validate and verify the terms of an agreement because it is built into the code.
What are Smart Contracts Use Cases?
With the above-mentioned benefits of smart contracts, there are many industries that can implement them to optimize their internal processes.
- The banking industry can reap the benefits of significant time and cost savings in processing loans and other transactions.
- The medical and healthcare industry can use them to access patient identity and cross-institutional data, therefore providing better medical services.
- Smart contracts can use smart contracts to streamline supply chain processes and negate the inclusion of counterfeit products.
- Real estate markets can use smart contracts to process a large number of property transactions and to reduce intermediaries, resulting in denoting cost and time savings.
- The energy industry can make the trading of energy commodities easier and more economical through the use of blockchain and smart contracts.
- The gaming industry can use smart contracts to maintain transparency between game developers and gamers, and also provide instant payments to developers when their games or in-game products are bought.
- The insurance industry can use smart contracts to reinitiate the trust between insurers and customers by making sure that companies pay out the eligible sum to customers and the customers do not make false claims to receive illicit payouts.
Smart contract Use:
Smart contract use cases range from simple to complex. They can be used for simple economic transactions like sending money from A to B. Smart contracts can also be used for registering any kind of ownership and property rights, like land registries and intellectual property, or managing smart access control for the sharing economy. Smart contracts have the potential to disrupt many industries. Use cases can be found in banking, insurance, energy, e-government, telecommunications, music industry, art, mobility, education, and many more.
With a smart contract, every agreement, every process, task, and payment can have a digital record and signature that could be identified, validated, stored, and shared. Time-stamping services like “Bernstein” (patent registry), or governmental and semi-governmental registries (land titles, birth cert cates, school, and university degrees), are examples of simple technological use cases. While time-stamping services are simple to implement on a technical level, the regulatory aspects of such use cases might be much more complex, depending on the type of industry and specific use-case. Smart contracts can furthermore be used for much more complex agreements between a multitude of actors, along the supply chain of goods or services, or for governing a group of people that share the same interests and goals without the need of traditional centralized institutions. Decentralized Autonomous Organizations (DAOs) are such an example and probably represent the most complex smart contracts. The smart contract hereby formalizes the governance rules – the bylaws, governing statutes, rules of procedure, or articles of association of an organization – and replaces day-to-day operational management with self-enforcing code.
Ethereum Smart Contract
Most of us associate blockchain with bitcoin, it’s most shiny and known use case. Ethereum, another groundbreaking cryptocurrency and blockchain platform was launched, by 18 years old genius developer Vitalik Buterin. Ethereum smart contracts allow for design, development and scaling of thousands of versatile applications. It’s Virtual Machine (EVM) Turing complete software enables simultaneous execution of operations by every node in the Ethereum network, resulting in faster and easier blockchain creation.
So how does typical Ethereum smart contract work?
Ethereum smart contracts are enforced and certified by parties called miners (GPU heavy servers), that use consensus protocol called Proof of Work (PoW). Each transaction or operation on the Ethereum network has a cost, expressed in Gas, a measure of the computational use of the unit. Gas price and limit are correlated to costs of launch a decentralized application (dApps) or development of decentralized autonomous organization (DAO). Ethereum miners add a transaction (eg: cryptocurrency payment, smart contract operation…) to a new block on Ethereum network., which as explained is a cost of executing smart contract operations. When smart contract is published or smart contract function executed, money verified and transferred to another account, miners get paid with Gas.
Ethereum Smart Contract Audit
Smart Contract Audit is the same as a conventional, standard code audit. It uncovers security vulnerabilities before the code is deployed to a production environment. The smart contract audit process includes automatic and manual penetration testing. Automatic audit targets commonly encountered security vulnerabilities, while manual audit tests for business logic vulnerabilities.
TheBlockBox smart contract audit process consists of manual code audit and security audits performed by automated tools. In this process, the TheBlockBox team analyzes smart contract’s functionalities and performs necessary checks against known vulnerabilities. The focus of the audit is to inspect a smart contract to trace and negate any potential for fund losses.
Smart contract audit report with clearly defined audit metrics provides an estimate of the overall severity of vulnerabilities. The report also exhibits categorized vulnerabilities, using risk rating structure based on impact and likelihood scores. Audit reports are typically requested by smart contract developers, product owners of decentralized apps, or CIO/CEOs.
Hyperledger Smart Contracts
Ethereum (a public, permissionless blockchain) and Quorum (private, permissioned blockchain based on Ethereum code) are based on execute-order architecture. Some of the limitations that this introduces are sequential execution of all transaction which directly affects transaction throughput. The main concept that differentiates Hyperledger Smart Contracts from other blockchains is its execute-order-validate architecture.
Hyperledger Smart Contracts domain is referred to as the chain code. Chaincode is a program that implements application logic and can be written in general-purpose programming languages such as GoLang, Java, NodeJS. This allows easier and wider adoption by software developers in contrast to domain-specific programming languages. At this point, Hyperledger is one of the most mature and stable platforms for smart contracts development, as it offers great performance with high transaction throughput, privacy, and modular consensus protocols.
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