Smart contracts are the answers to make your complex transactions easy. Industry leaders and Blockchain experts have been figuring out ways to use Smart contracts in blockchain to make the transactions easy and accurate. If you are looking for smart contracts explained in detail, you have come to the right smart contracts guide.
What Are Smart Contracts in Blockchain?
They are code lines that execute by themselves on fulfillment of a set of conditions and terms. These terms and conditions are provided in the code beforehand. On an application level, a Smart contract helps you to trade property, money, shares, or any valued financial asset transparently without the need for a middle-person.
To better understand this, consider smart contracts as a vending machine. You pay through your Bitcoin and get the product/service you want. You would not go to a specific service/product producing company, pay them and get their services/products. Like a traditional contract agreement, smart contracts have rules and penalties clearly defined. Once, these are met, the obligations are automatically enforced.
Smart contracts are essential in business collaborations where all the parties can enforce the agreement transparently without the involvement of a third party or a middleman.
Do Smart Contracts Need Blockchain?
Smart contracts and blockchain go hand in hand. It is easier to understand with the following example. Suppose you need to purchase a car through a vehicle dealership. There’s just a lot of documents to go through; if you need financing, you need to get in touch with the bank who will go through your credit score, etc. You need to connect with different people from the car dealership person, financer, the bank, etc. For all their works, you need to pay their fees along with the base price of the car.
But with smart contracts, your details are stored securely on the blockchain. Smart contracts cut down the process of having intermediaries through a process due to a lack of trust between different parties. In this example, since your identity and details are stored on the blockchain, banks can quickly decide the credit. Once they do that, it creates a smart contract between the bank, dealer, and lender. Once the dealer gets the funds, the transfer of the car’s title process happens on the pre-determined terms.
Is Smart Contract Legit?
Smart contracts are the next big thing in Blockchain technology. But like everything, there has been a history of scams through contracts.
While smart contracts offer an excellent means to verify and automate transactions hassle-free, be extremely careful while getting into one. Choose to deal with only verified parties for your smart contract. Read the terms and conditions in the agreement thoroughly before signing up for a smart contract. A suggestion is to take this to an established lawyer to identify blind spots in the contract.
While smart contracts provide a promise in increasing commercial efficiency, it is not clear about the technology and security of this means. As a result, smart contracts are still facing difficulty to comply with the existing legal jurisdictions of a particular place. Further development in smart contracts technology will see how it will replace the traditional, intermediary form of transactions between parties in businesses.
How Do I Make A Smart Contract?
To establish cryptocurrency smart contracts, you need to know a bit of coding. Either you can follow tutorials on the Internet or hire someone to do it for you. But make sure they are trustworthy and have the experience to create cryptocurrency-based smart contracts.
- First, install the pre-requisites to code the smart contract. It involves downloading browser extensions, browsers, wallets, and libraries to code.
- Create a wallet to store the cryptocurrencies. One of the services to do that with is meta-mask.
- Then choose a test network to test your cryptocurrency transactions.
- Put some dummy cryptocurrency in the wallet.
- Choose an editor remix to code the smart contract through Solidify.
- Deploy your smart contract and make it LIVE on the cryptocurrency network.
How Smart Are Smart Contracts?
They are smart because they automate a lot of processes. Here are some of the factors that make these contracts ‘smart’:
Depending on the type of the smart contract model, the promise in the contract can either be non-contractual or contractual.
They are electronic-based contracts that are created using codes, which in turn consist of conditions and outcomes.
The programmer provides the contractual clauses and functional clauses in the code.
Once you deploy and initiate this smart contract, it’s running cannot be stopped until it reaches a condition that cannot be met by the process.
One of the popular cryptocurrencies for smart contracts is Ethereum. Given how Blockchain and cryptocurrency are booming currently, there is a lot of promise for smart contracts working in this financial asset class.
What Risks Do Smart Contracts Eliminate?
The core concept of smart contracts involves placing the data in the Blockchain in a way visible to all concerned parties. Through this de-centralization, a lot of risks eliminate.
For instance, it is virtually impossible to manipulate this data once it is on the blockchain. The computing power that it requires is unachievable because the manipulator has to gain control of the entire smart contract on blockchain to manipulate one block.
There is no non-performance risk because the contract clauses will only execute on meeting with specific terms. So, every party in the deal has to perform as written in the contract.
Lastly, there is no scope of errors in smart contracts. Once coded and deployed, there is no way for the contract to be altered without the proper authorization of all involved parties. Moreover, since there are no intermediaries, the content of the contract follows a universal language, that is, the piece of code in which it is written. Thus, there is no scope for individual party mistakes while drafting the contract.
How Do Smart Contracts Work?
There are four principles to every smart contract.
To begin with, determine the contract subject. This subject gives access to goods or services for the contract.
Next, you need private (digital) keys from all the parties of the contract.
Then define what the contract terms are. Here you specify the sequence of activities and their conditions that must follow once you deploy the contract.
At last, you need a decentralized platform. For instance, a blockchain network that keeps this smart contract safe from any alterations or misuse.
Smart Contracts In Blockchain Explained
The parties in the contract must decide the terms that will go in it. Once these are finalized, it is transformed into programming code. This code has different conditional statements that will execute as and when the parties fulfill it within the contract.
Once you create the code, it is put on the blockchain and all contract participants can view it. Following this, the code is executed on all computers, and when specific conditions mentioned in it are met and all the participants verify it, the transaction corresponding to it executes.
Can Smart Contracts Be Legally Binding Contracts?
If a smart contract has to be legally enforceable, it must have all the elements of a legally binding paper contract. In a paper contract, for example, it is extremely easy to determine the parties that are a part of the contract. On the other hand, in smart contracts, since the entire text is written as a code, it is not easy to determine the involved parties. Therefore, it may not be legally binding in many cases.
But in the other case too, an electronic contract does not mean that it will not be accepted by the law. But the smart contracts law asks for the contract to be easily accessible in the future, and the parties in the contract must consent to this. You can enforce a contract between a normal person and an electronic agent if other elements of the contracts are present, which are seen in legally binding paper contracts.
The blockchain and its related technologies are still new for many countries and governments around the world. They are yet to frame concrete regulations surrounding the same for more clarity. With the coming times, you can expect to get more clarity on these.
Can Bitcoin Do Smart Contracts?
If you are into smart contracts, you might have come across more people talking about building it with Ethereum and not Bitcoin. But in reality, even the Bitcoin network works with smart contracts as well as Ethereum. Some services like Particl.io use Bitcoin smart contracts to store money in their escrow – Mutually Assured Destruction.
Smart contracts on Bitcoin provide high functionality but without the complication with privacy and security as in the case of Ethereum based platforms.
But in reality, the scope of programming on Bitcoin for smart contracts is less comparing to Ethereum. You will need to use added features to Bitcoin through improvement proposals.
For example, in Particl.io, a newly added smart contract feature is the OP_CHECKLOCKTIMEVERIFY opcode that allows scripting that prevents money from being spent from multiple signature wallets till the time some time passes or you implement a specific signature pattern. This opcode is a part of the Bitcoin Improvement Proposal.
Where Can Blockchain Smart Contracts Be Used?
Here are some real-world applications for smart contracts.
- There have been estimations of huge savings by implementing smart contracts in the trade finance sector. Research by Santander Innoventures said that at least $20 billion worth of money was saved due to Blockchain technology. It is mainly due to automating workflows and calculations that are highly labor-intensive.
- In the case of property ownership, smart contracts can record the ownership history of the property. It is a much better option than current manual systems and can record ownerships of all property types from watches to buildings to land.
- The mortgage process right now is a headache. Smart contracts make this quick and secure. It will allow property buyers to get to the property in much lesser time with less effort.
- In medical research, blockchain technology transmits highly private patient information between different medical departments. Patients usually prefer to have their medical information safe from unauthorized individuals.
- Medical research firms can also use this blockchain technology to keep the large set of medical data, formulas safe and secure.
- The insurance companies spend tons of money processing insurance claims throughout the year. Smart contracts can conduct error checks and provide the payout amounts depending on the set of criteria. It takes lesser time to process with a reduction in errors.
In a nutshell, in any industry that deals between different parties/stakeholders with important, private, and sensitive information, blockchain can provide a robust security layer. From supply chains to product developments, blockchain changes how people deal with each other. There will be less manipulation, errors, and frauds arising from this in the future.
Why Are Smart Contracts Important?
It’s not uncommon to hear fraud cases in virtually every industry right now. There is a bane associated with technology – It gives more scope for malicious activities. A smart contract is a solution to this.
With smart contracts, you do not need to use broker solutions to facilitate transactions. It saves time, hassle and enables automation of all agent work. There is also no human participation in the transaction. The data is safe since no party can alter the information on the blockchain. You can create customized environments to trade and exchange items of value through secured contracts on the blockchain.
You can almost eradicate falsification of votes in elections through smart contracts, it can help create smart contracts in logistics and works similarly in many other fields.
How Much Does It Cost to Create A Smart Contract?
Smart contracts are a complex undertaking, but it is not only the developmental costs that go into it but also the testing and deployment costs. Also, you need a proper programmer and auditor expert in a specific niche, so the cost to pay them will also be high.
To put it in perspective, a contract with no complicated logic and clauses will cost around $7000. The advanced ones can cost upwards of $45000. Some large organizations spend more than $100000 in preparing smart contracts. There is also a price for deploying these contracts on the network. You can know this depending on how complex the smart contract is.
Smart contracts are yet to be made mainstream. Small and medium scale businesses are still unable to implement these because they have complex code, and are also expensive to deploy. Also, in some cases, it is tough to predict if these contracts can be legally binding in a particular region.
What is a Smart Contract Address?
A contract is like an account on the cryptocurrency network. Like a cryptocurrency wallet, this contract also has an address for sending and withdrawing funds. You can enter this address in Etherscan to see the history of transactions associated with this network. It is a public key through which you can invoke the contract in that address.
Can Smart Contracts Be Changed?
By default, any smart contract on Ethereum is immutable. It is because it is on the blockchain, and there is no way to create alterations. Think of smart contracts as an unbreakable contract between the participants. But you can take other ways if you want to update something on the smart contract. Updating the smart contracts in many cases is even necessary, as it provides security to the Ethereum associated with it.
If you want to update your contract, you can either create a new version of the smart contract and deploy it. Or you can conduct a manual migration of all the elements of the old contract to a new smart contract.
But manual migration is an expensive process. Also, the address of the new contract will change. So, you need to inform and update other smart contracts linked to old smart contracts. You need to inform all the participants in the smart contract to start using the new one. They may be slow to migrate.
An easier way out is to use something called a proxy contract. This contract has an interface that contains methods. Every method on this contract delegates to the implementation contract that contains the logic. You execute the code keeping the proxy contract in context and not the implementation contract.
This approach is easy because the users will only directly interact with the proxy changes. Should you need, you can change information and logic in the implementation contract.
Ethereum Smart Contracts Explained
Like Bitcoin, Ethereum is a public blockchain and is ideal for creating and processing smart contracts because of its advanced coding functionalities. The transactions happen with ETH or Ethereum tokens.
What languages are Smart Contracts Are Written In?
One of the most common platforms for Ethereum based smart contracts in Solidity. There are many alternate blockchains too that use smart contracts compatible with Solidity. You can deploy smart contracts on Ethereum through Solidity and port it to alternate blockchain networks as well.
If you want to develop smart contracts outside of Blockchain, you can use the more common programming languages like C++, Java, Golang, etc.
How Many Smart Contracts Are There on Ethereum?
There has been a steady and optimistic increase in the list of Ethereum smart contracts on the network. The number of smart contracts on Ethereum reached an all-time high of 1.5 million in 2018, but the average fell to 670,000 in 2019.
According to Dune Analytics, the average of smart contracts per month from 2019 to 2020 mid, was around 670,000 contracts. Although the number has been increasing, many smart contracts do not display any transactions. The end-user engagement of these smart contracts has to improve in the coming days.
Smart Contracts FAQ
What are the advantages of Smart Contracts?
Smart contracts on blockchain networks cannot be changed and are highly reliable, as a result. All the parties who are a part of the contract can see all the elements and transactions on the contract. This ensures high transparency. You save costs because there are no third parties involved in the implementation of these contracts. The execution of smart contracts is incredibly fast because of the use of algorithms and code.
What are the disadvantages of Smart Contracts?
One of the main drawbacks of smart contracts is a weak legal binding to them in many countries and regions. Adding to this, you need to consider the transaction speed and effort for every transaction on the smart contract, as this will determine how many fees you have to pay. Next, it is hard to update smart contracts. Lastly, you need an experienced and specialized programmer for creating a smart contract, and you are likely to entirely depending on them for the technical side of this process. Since you have to code smart contracts, they are also more prone to bugs.
Is Smart Contract the Future?
Smart contracts will change the way businesses deal with various stakeholders in their transactions and business processes. Since the routine tasks are automated through smart contracts, it gives more time and space to the administrators to work on more important decisions. But for smart contracts to be mainstream in the future, the infrastructure costs and effort have to be minimized significantly. More programmers and coders need to be specialized so that any updates and execution through smart contracts become easy.
What Are Some of The Famous Smart Contracts Applications?
One of the smart contract examples is Ethereum that is the top choice for most businesses and developers. Another type of smart contract is Hyperledger Fabric. It is an open-source project to support blockchain ledgers. Another example of the smart contract is the popular application, Nem, which is also preferred because the code is written in Java. One of the oldest smart contract platforms is Stellar, created way back in 2014 and is seen as one of the top 10 smart contracts on Ethereum examples.
Takeaway – Smart Contracts Beginner’s Guide
Smart contracts are the future, although this technology and application have to evolve. It will change how businesses carry their deals, and promise more reliability, security, and transparency. The major challenges for smart contracts are clearly defining their legal status, getting the right programmer to deploy these, making money with Ethereum smart contracts, and maintaining the overall infrastructure costs. The need of the hour is to make smart contracts smarter!