Blockchain technology is slowly evolving and revolutionizing the way in which corporates and even individuals transact and even fruitfully create wealth. This technology is the current and only way that facilitates secure ‘peer-to-peer’ transaction negating the requirement for a middleman.
To quote Vitalik Buterin(co-founder of Ethereum):
“Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly.”
Blockchain works on a simple principle that all computers(called nodes) exist in the Blockchain environment have access to a common ledger and the transactions between users are completely transparent. In this model, there is rarely a chance of being fraudulent.
Some interesting facts about Blockchain are that they are currently helping banks save billions of dollars by instantaneous transactions, the IoT is being matured to consume this technology and medical record keeping is taking giant strides to integrate this path-breaking paradigm.
Many cryptocurrencies starting from Bitcoin have evolved and now number in the thousands. There is a provision wherein cryptocurrencies can introduce ‘intelligence’ in the way transactions take place and how ledgers are updated.
The feature called ‘smart contract’ is a smartly encoded mechanism that bonds a digital contract between stakeholders and executes all the clauses, enlisted without needing any other entity to overlook. Such a virtual contract promises seamless applications in various domains and is being widely appreciated for its flexibility and versatility.
Also Read: What is a cryptocurrency exchange?
How Smart Contracts work?
Smart Contracts are certain protocols that are defined between stakeholders and are executed at the apt moment to either streamline, validate or thwart breach of trust or inappropriate transactions.
Smart Contracts are actually coded by an experienced developer who is well versed with the language and is aware of the clauses of the contract. The developer transmutes these clauses into a machine, thereby achieving automation.
Smart Contracts are an incredibly complex piece of software in the habitat of Blockchain and are generally implemented as a governing virtual machine executing the code in understandable network parlance(for example Ethereum).
Smart Contract use cases
Smart contracts are one of the business applications that Blockchain provides a way to effectively leverage internet users. There are many other business applications like file storage, crowdfunding and a host of others that are evolving and will be deployed for practical uses.
Consider a typical use case for smart contracts relevant to real estate. An owner and a prospective tenant agree upon a stipulated advance and monthly rent. They also agree to transact between themselves using cryptocurrencies.
In such an agreement a smart contract can be designed such that unless the owner receives the advance and regular monthly rent, the tenant can be abstained from receiving a digital key that provides access to the accommodation. Likewise, if the tenant has paid the money promptly and still does not receive the key, the contract will refund the tenant’s money without delay.
Only our imagination is the limit to leverage such a decentralized approach for making transactions. We can think of smart contracts adopted by authorities for voter poll assessment and analysis. Such a system can highlight any discrepancy such as low turnout and fraudulent exercise of the franchise.
Smart contracts are much suited to the management of large businesses like in airports, retail and logistics. A well-coded contract can virtually eliminate the need of a human when handling transaction between stakeholders. Such a system proves to be more of efficiency since it can work round the clock.
In the automobile industry, the ‘in-thing’ that is happening is autonomous or self-driven cars. Cars are connected to the internet and this paves the way to bring them into the world of Blockchain and design smart contracts for achieving accident tracing that would aid insurance companies.
How do Ethereum smart contracts work?
Smart Contracts were introduced in Bitcoin but in a very rudimentary way. Bitcoin introduced smart contracts as a restrictive scripting language containing a few hundred scripts. Such a system is prohibitive in the fact that it is not scalable.
Ethereum is the platform built on the purpose of supporting smart contracts. Ethereum supports a language that users can adapt to design and deploy smart contracts. This language is well stocked and supports numerous programming constructs.
The Ethereum Virtual Machine executes the autonomous agent(smart contract) in a way that can be understood by the network.
Implementation of smart contracts
A few implementations of smart contract that have left a significant mark in the industry are:
- Bitcoin provides a minimal(Turing incomplete) facility for a smart contract that can work on Bitcoin like escrows, time locks, etc.
- Ethereum is the most widely developed and adopted framework to develop smart contracts boasting an almost Turing complete language.
- Ripple is another framework whose smart contract development was phased out in 2015.
- Other frameworks with tangible impact are RootStock, Namecoin, Automated Transactions and EOS.
Pros and cons of smart contracts
The advantages of smart contracts far outweigh the disadvantages, but they should not be overlooked.
The pros of smart contracts are:
- Autonomous or self-driven: No or minimal need for human intervention.
- Safety in numbers or trust: The documents are encrypted on a shared ledger. No scope of corruption or misplacement.
- Replicated to the entire set of Blockchain nodes: Documents are replicated across the Blockchain nodes. There is a peace of mind when not getting deleted.
- Speed: Bureaucracy is avoided by software code to process business flows thus providing swiftness.
- Accuracy: paperwork is minimized by adopting digital contracts.
The cons of a smart contract are:
- Inefficient or faulty coding: There is a high probability that the smart contract code could be faulty and not support exhaustive validation. There could be breaks in the contract that would attract violation for big businesses.
- The issue of regulating and taxing smart contracts: There is no single rule as to how to regulate smart contracts(in terms of leniency and strictness). People could get away making huge transactions without paying the overhead involved.
Smart Contracts are paving a way to extend the Blockchain technology, thus bringing in much automation and depriving human intervention. As discussed in the article, smart contracts are only limited by human creativity and they require only the niche domain, problem statement and effective coding.
What is to bear in mind is that the smart contracts are not all ‘peaches and cream’ and have their own set of drawbacks. A proper consideration has to be first baselined before incorporating smart contracts into the system, failing which, there could be a serious backlash.