What is Smart Contract? New Premier Guide

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What is Smart Contract?

Smart contract is a self-executing contract with the terms of the agreement directly written into lines of code. It runs on the blockchain and operates in the digital space, transmitting, verifying, or executing the contract autonomously through computer systems.

The decentralized nature of blockchain and its tamper-proof data make smart contracts particularly suitable for blockchain implementation. The development of blockchain technology has expanded the potential applications of smart contracts.

In essence, a smart contract is a program made up of computer code. The process of forming a smart contract involves three steps: First, the parties involved negotiate and agree on the terms, which are then encoded into a smart contract. Second, the smart contract is broadcast and stored across various blockchain nodes. Third, once the conditions are met, the smart contract automatically executes its terms.

A useful analogy is a vending machine: when a coin is inserted, it triggers the release of the chosen drink, and this action is irreversible, similar to how a smart contract operates.

The term “smart contract” can be traced back to at least 1994, coined by the prolific interdisciplinary legal scholar Nick Szabo. He defined it as follows:

“A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”

How Smart Contract Work

Traditional contracts outline the terms of an agreement between parties and are usually enforced by law. Smart contracts, however, are digital, stored on a blockchain, and use cryptographic code to enforce the agreement.

In other words, smart contracts are software programs written and operated using Turing-complete programming languages, such as those used in Ethereum. Once the conditions coded in the smart contract are met, the obligations are automatically executed as intended by the programmer.

Characteristics of Smart Contract

1. Trustless Nature:

Smart contracts are digitally written into the blockchain, making the contract terms transparent, well-organized, and immutable. The principle of “code is law” ensures that transactions can be conducted securely even in trustless environments.

2. Immutability:

If obligations are coded in an “if-then” format, such as “If A completes task 1, then payment from B will be transferred to A,” smart contracts enable the trading of various assets. Each contract is duplicated and stored in a distributed ledger, making the information tamper-proof and ensuring complete anonymity for participants.

3. Economical, Efficient, and Dispute-Free:

Unlike traditional contracts, which often lead to disputes over interpretation, smart contracts minimize such disagreements through precise computer language. Arbitration results are executed immediately, making smart contracts more economical and efficient.

Use Cases of Smart Contract

  1. Basic Applications:
    Smart contracts can issue tokens and distribute dividends based on blockchain technology. During STO financing, deploying smart contracts is necessary to define issuance conditions and subsequent terms, including automatic dividend distribution.
  2. Automatic Execution in Finance:
    Smart contracts’ automatic execution capabilities make them ideal for finance. In P2P lending, bank loans, and credit card transactions, smart contracts can set up safeguards that trigger actions (e.g., automatic lien release) in case of default, preventing fraudulent behavior.
  3. Decentralized Applications:
    Combining smart contracts with blockchain’s decentralization can streamline user experiences in scenarios like medical insurance claims or auto insurance. Smart contracts simplify processes by automating claims and reducing costs.
  4. Trust-Based Applications:
    In scenarios requiring institutional trust, such as escrow accounts or trust fund management, smart contracts add an extra layer of security, ensuring that trustees act within predefined boundaries.
  5. Medical Field:
    In medicine, smart contracts can improve clinical trials by automating patient data and facilitating inter-institutional data sharing, enhancing patient privacy and trial efficiency.
  6. Other Applications:
    Smart contracts can be widely used in IoT for identity verification, product tracking, logistics, and in digital content management for rights allocation and revenue distribution.

Importance of Smart Contract

Smart contracts enable the development of a wide range of decentralized applications (DApps) and tokens. They can be used for innovative financial tools, logistics, gaming experiences, and more. Like any other crypto transaction, smart contracts are stored on the blockchain and are generally immutable once deployed, though some exceptions exist.

Smart contract-based applications, often called DApps, include DeFi technologies that aim to revolutionize banking. DeFi allows for complex financial transactions without intermediaries, providing opportunities for saving, lending, and insurance.

Popular smart contract-driven applications include:

Security Issues

Smart contracts are “computerized transaction protocols that execute the terms of a contract.” All blockchain users can view blockchain-based smart contracts, including any vulnerabilities. This visibility can lead to potential exploits.

For instance, in June 2016, a vulnerability in The DAO’s Ether caused a $50 million loss. Developers sought consensus on a solution, ultimately implementing a hard fork to recover the stolen funds before the deadline.

Issues in Ethereum smart contracts can include Solidity programming errors, compiler bugs, Ethereum Virtual Machine errors, network attacks, immutable code flaws, and undocumented vulnerabilities.

Conclusion

Smart contracts are now implemented across various blockchain networks, prominently in Bitcoin and Ethereum. Their applications span many fields, from social security to IoT, real estate, IP protection, and more.

Despite current drawbacks like irreversibility and lack of legal oversight, smart contracts are expected to evolve alongside blockchain technology. In the future, smart contracts will likely become an integral part of our daily lives.

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