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Smart contracts: what is it and why are they needed

  • Written by Harnil Oza



Smart phone, smart home, smart watch ... There is a global trend and it did not bypass the crypto world.

Today we will talk about one of the most breakthrough features of the blockchain - smart contracts. They were first implemented on the Ethereumplatform, and their success ensured such a growth in the coin rate that many people started talking about the imminent change of the cryptocurrency leader. And although the bearish trend of 2018 seriously undermined the last prospect, the use of smart contracts is steadily expanding, covering all new areas.

What is a smart contract in simple words?

At its core, a smart contract is a program code executed on a virtual machine of a specific blockchain platform. When performing certain actions, transactions, events, this code performs other actions, transactions, which are recorded on the blockchain.

We show this on the most famous example of the use of smart-contracts - ICO.In order to raise funds for the development of their product, the startup team creates a smart contract, which, in response to sending ether or other coins, transfers its own project coins to the sender's address at the established rate. Sent ether - you get tokens, which you can then sell or store in your wallet.

The main difference between a smart contract and a regular purchase is process automation and the elimination of the human factor. The other party cannot postpone the execution of the contract, suspend it, unilaterally change the terms. This is especially important when the parties cannot fully trust each other.

Previously, intermediaries were used to build trust. For example, people did not just conclude a contract between themselves, but did it at a notary public. The notary acted as a third party, confirming that one party (seller) owns some property and voluntarily transfers it to the other party (buyer) for a certain fee. Now the role of a notary is fulfilled by a smart contract.

Ethereum Smart Contract

Ethereum was the first platform to introduce smart contracts in 2013. Here's how it works:

The user initiates a transaction that is sent to a network of peers (nodes). A transaction usually means the transfer of cryptocurrency, but it can also be the transfer of any information.

Nodes confirm the transaction.

A confirmed transaction is merged with other transactions. So a new registry block is formed. When a transaction is completed, it is no longer subject to change.

Ethereum founder VitalikButerin explains how smart contracts work as follows: cryptocurrency or any asset is transferred to a program that monitors the fulfillment of the terms of the contract. When the conditions are met, one side receives money, and the other receives the goods. It’s like a vending in which you buy coffee or any product, only without the participation of third parties. The whole process is fully automated.

Projects on smart contracts

Buying tokens is a simple option for using smart contracts, but they can be created for any arbitrarily complex transactions. Already, projects on smart contracts are actively capturing the market. They can include several parties, use complex transaction schemes, and include in the conditions the occurrence of certain events in the outside world (special trusted nodes called oracles are used to enter information from outside the blockchain).

The prospects for smart contracts are fantastically wide. Already, in addition to ICOs, they are used for online gambling and betting, creating and selling virtual collectible items, and direct payment for content by subscribers.

Smart contracts also cover markets such as real estate, tokenized stocks and other securities, insurance, automobiles, licensed content sales, jewelry, art objects - areas where billions and trillions of dollars revolve.

Advantages and disadvantages of using smart contracts

The use of smart contracts guarantees the simplicity and speed of transactions. You do not need to prepare and agree on the details of the contract with each individual client, each time attracting expensive lawyers, make an international bank payment (for large amounts, this can take several days and cost thousands of dollars), draw up and accompany the transaction.

Once developed, the program will automatically execute tens and hundreds of transactions per day without your participation. Reduces smart contract and fraud risks, both on the part of the seller and the buyer.

Without sending the indicated amount, the program will not take any actions, after receiving the coins it will automatically perform them, the ability of one of the parties to intervene in this process (to delay part of the amount, to fulfill contractual obligations not in full, as is often the case in the real world) is excluded.

However, smart contracts have certain disadvantages, primarily vulnerabilities in program code. They have repeatedly led to the theft or freezing of funds, including multi-million dollar amounts. Every year the number of smart contracts is growing, and it is almost impossible to conduct a thorough audit of each, therefore a number of companies are now developing tools for automatic auditing, designed to identify code flaws. They should, if not finally solve, then significantly smooth out the problem. 

Another significant limitation of smart contracts is the inability to use personal terms, discounts, etc. To do this, you will have to develop a new smart contract, perform its audit, which is far from always advisable. So in areas where they apply an individual approach to customers, smart-contracts will not help much.

However, in areas with many standard contracts, smart contracts will make a real revolution, replacing millions of office employees and speeding up lengthy procedures, so most new digital startups are now developing not cryptocurrencies as means of payment, but platforms for smart contracts in various types of businesses.

Author Bio:

Harnil Oza is CEO of Hyperlink InfoSystem, a mobile app development company in New York and India, having a team of the best app developers who deliver the best mobile solutions mainly on Android and iOS platforms. He regularly contributes his knowledge on leading blogging sites like top app development companies.

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