What is a smart contract?
Smart contract (English. Smart Contract-“Smart Contract”)-a computer algorithm designed to conclude and maintain self-filled contracts performed in the blockchain environment.
Such contracts are recorded in the form of a code that exists in a distributed register – a blockchain that is supported and controlled by a network of computers. In simple words, smart contracts allow you to exchange assets without resorting to the services of intermediaries.
What is the chip of smart contracts?
Smart contracts make it possible to perform reliable and confidential transactions without the participation of external intermediaries in the person of banks or state bodies. In addition, such transactions are traced, transparent and irreversible.
Smart contracts not only contain information about the obligations of the parties and sanctions for their violation, but also automatically ensure the fulfillment of all terms of the contract.
How smart contracts appeared?
The first ideas of smart contracts were proposed in 1994 by Nick Sabo. He described a smart contract as a computer protocol, which, on the basis of mathematical algorithms, independently conducts transactions with full control over their implementation.
For the first time, the ideas of sabo were embodied in practice along with the advent of the first cryptocurrency bitcoin and the underlying blockchain technology. Some principles of smart contracts were laid in the Bitcoin protocol. However, most modern blockchains, including bitcoin, do not have fullness in turing, so their “contracts” are relatively simple designs, such as multi -signature or transactions with delayed execution.
Smart contracts received wide practical use with the advent and development of the Ethereum project. In 2013, its future founder Vitalik Buterin came to the conclusion that bitcoin is poorly suitable as a basic protocol for smart contracts, since it was not originally designed for this task. Subsequently, Buterin decided to create from scratch the most suitable protocol for smart contracts.
How the smart contract works and what are its obligatory elements?
Typically, the smart contract is recorded in the blockchain, where all its logic is placed in a software container-block. The latter combines all messages related to a specific smart contract. Messages can play the role of the inputs and outputs of the program code of the smart contract and lead to any actions outside the blockchain, in the real or digital world.
Mandatory attributes of a smart contract:
- the use of electronic signatures based on public and private keys available in two or more sides of the agreement;
- the presence of a private decentralized environment (for example, Ethereum), in which smart contracts are recorded and which supports the inputs and outputs for oracles that ensure the connection of the real and digital world;
- The subject of the contract itself and the availability of tools necessary for its execution (cryptocurrency settlement accounts, programs-oracles, etc. D.);
- The precisely described conditions of its execution, which the participants in the contract confirm with the signature, as well as the reliability of the source of digital data.
What are smart contracts?
Depending on the degree of automation, smart contracts can be:
- Fully automated.
- With a copy on paper.
- Mainly on paper, while part of the provisions were transferred to the software code (for example, when only payments are automated).
Blockchain solutions are only at an early stage of development. Technologies are tested and finalized, so in practice really complex smart contracts have not yet been used. To date, CoinShares Launches the vast majority of smart contracts belong to the third type, where only certain aspects of the agreements are automated, in particular, the exchange of funds for property rights. Example: Buying using a smart contract of an apartment in Kyiv through a decentralized marketplace Propy (payment was made in Ethereum, and the seller was territorially in New York).
Where else can smart contracts be used?
The potential capabilities and areas of use of smart contracts are extensive-from a simple multi-signature to operations with derivative financial instruments. Multisig multisig, Escrow)-the simplest, classic example of a smart contract. With its help, the contractors that do not trust each other can freeze a certain amount of coins in the blockchain in such a way that, if necessary, to spend this amount, more than half of the participants will need to be signed.
Smart contracts are widely used in the field of primary coin distributions (ICO). For example, a smart contract can be programmed in such a way that by sending cryptocurrency to the project’s wallet, Kroudsale participants will be sure that in the event of a campaign, their funds will be automatically returned; If the financial goal of the ICO is achieved, then the funds will be transferred to the developers. However, this will be done, provided that a sufficient number of cartoon participants (if provided) activate their keys, thereby personally confirming the good faith of the project.
Many experts include the financial market (banking services, insurance, derivatives trading), accounting and audit, management of supply and logistics, all kinds of voting, smart transport, digital identification of personality, etc. D.
What are the advantages of smart contracts compared to traditional contracts?
Supporters of smart contracts are convinced that many types of contractual relations can be partially or fully filled. Cryptography underlying smart contracts provides a higher level of security than traditional contracts based on the right. Smart contracts can reduce transaction costs, as well as exclude the risks of ambiguous interpretations of the conditions or unjust decisions of the courts.
Thus, among the main advantages of smart contracts, one can distinguish:
- autonomy (to conclude and confirm the transaction, you do not need to look for an intermediary in the person of a broker, a bank, a notary, and t. D.);
- reliability and safety (a multiple duplicated contract is stored in an encrypted form in the blockchain);
- The security of the system is guaranteed by mathematical laws and makes hacker attacks unlikely, as well as the substitution of information retroactively;
- Savings and speed – thanks to the blockchain, many intermediaries are eliminated and processes are automated;
- Accuracy – due to automation and minimization of handmade, the likelihood of errors that often appear when filling out forms in the process of coordination and manual conducting various operations under the contract is reduced.
Does smart contracts have disadvantages?
Smart contracts are far from perfect: blockchain-infrastructure is still not well developed and critical errors are found in the code itself. In addition, there are still a lot of gaps in the regulatory regulation of smart contracts are undeveloped by the oracles, designed to ensure the attachment of the digital world to the real one and provide the contracts with the input data for their execution. All this creates certain obstacles to the integration of smart contracts into the daily activities of organizations and individuals.
In some cases, smart contracts are less flexible compared to conventional contracts. Information falling into the blockchain cannot be further changed, therefore it is extremely important to observe the accuracy and reliability of the initial information, as well as prevent errors when entering data.
In addition, many banks and large corporations are not suitable for the exchange of confidential data through open distributed registers. The problems of scaling and transaction processing speeds are also still relevant.
The forces of many developers are aimed at solving these and other problems and restrictions, and within the framework of various platforms they are decided in different ways. Progress does not stand still, and in the future many issues and problems will be resolved, and economic agents will completely move from the preparation of traditional contracts to their digital embodiment and even to their implementation with the support of artificial intelligence.