A smart contract is a set of computer code between two or more parties run on top of a blockchain and constitutes of the set of rules which are agreed upon by the involved parties. To put it simply, smart contracts are automatic executable lines of code stored on a blockchain that contains predetermined rules.
The concept was first introduced by Nick Szabo, a legal scholar, and cryptographer in the year 1994. Szabo highlighted that any decentralized ledger can be used as self-executable contracts, which were later on termed as Smart Contracts.
Smart contracts are deemed to be of one of the most successful applications of blockchain technology.
An Automated Future
Although the idea of smart contracts came into existence long back, the world currently relies on paper-based contracts. With even digital contracts, the involvement of a trusted third-party from the system cannot be completely eliminated.
This involvement of third-party might lead to security issues or fraudulent activities along with an increased transactional fee.
Smart contracts are mostly beneficial in business collaborations used to agreed upon the decided terms set up by both parties.
Once, certain conditions of a smart contract are met they can automate the transfer of cryptocurrencies, fiat money, or even the receipt of a shipment of goods that within a supply chain.
How Do Smart Contracts Work?
Smart contracts is a term used to describe a set of computer code that automatically executes all or parts of an agreement while storing it on a blockchain-based platform.
The code can either be the sole manifestation of an agreement between parties or might complement a traditional text-based contract thereby executing certain provisions: such as transferring funds from one party to an another party.
When these rules are met, these code executes on themselves its own and provides the output.
The code itself is replicated across multiple nodes of a blockchain and, therefore, benefits what blockchain offers: from security, permanence and immutability. The replication also means that as each new block is added to the blockchain, the code is executed.
If the parties have indicated that certain parameters have been met, the code will automatically execute the step triggered by those parameters.
However, if no such transaction has been initiated, the code will not take any steps. Most of the smart contracts are written in Solidity.
While the noteworthy fact is that blockchains are decentralized across dozens or thousands of nodes, smart contracts are not.
They are run on a single node. The blockchain nodes have no visibility into how a particular smart contract works; therefore any consortium of companies that are a part of a blockchain network must rely on one oracle for the information being fed into a smart contract.
Although smart contracts are still in their developing phase, they might still face certain vulnerability attacks. In order to make smart contracts more secured, both, cybersecurity practices as well as platforms used to create smart contracts need to be updated from time to time.
Smart Contracts Are Limitless In Their Approach!
Smart contracts are limitless in their approach, as they can be used in building decentralized exchanges, tokenized assets, games, voting systems, crypto wallets, mobile applications and much more more
They may also be deployed alongside other blockchain solutions in the fields of healthcare, charity, supply chain, governance, and decentralized finance (DeFi).
The potential of smart contracts ranges from small-time regular investments as well as for governments or large enterprises too that chunks on a huge amount of money in the form of fees. The need to eliminate intermediaries is what makes smart contracts appealing.
Smart contracts saves the day by eliminating intermediaries like lawyers or government bodies. It makes the whole process more automated and streamlined in the daily affairs of routine transactions.
Flexibility is the biggest plus point of incorporating blockchain technology into smart contracts. Developers can store any type of data within a blockchain.
Lessons From The DAO Attack
However, smart contracts do carry some limitations as they are based on a blockchain system, they tend to be either immutable or very hard to change.
To cite this, when Decentralized Autonomous Organization (DAO) or The DAO got hacked in 2016, millions of ether were stolen due to the flaws in their smart contract code.
However, since smart contract are immutable, developers were unable to fix the code.
The problem, however, didn’t come from Ethereum blockchain. Instead, was caused due to faulty smart contract implementation. Moreover, another limitation of smart contracts is that it is related to their uncertain legal status.
Not only because it’s in a grey area in most countries, but also because smart contracts don’t suit the current legal framework.
Currently, industrial players are looking in implementing blockchain smart contracts as they can realize its potentiality.
Although smart contracts still need to evolve before they are widely adopted for complex commercial use cases, they have the potential to revolutionize how parties contract in the future.
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