To begin with, smart contracts were introduced in the nineties. And the first person who spoke about smart contracts was Nick Szabo. He even offered his own definition of smart contracts. We will give it here, of course. According to Nick Szabo, smart contracts are tools, which formalize and make computer networks safe. It is absolutely possible due to integrating protocols along with user interfaces. The main idea offered by this great man consisted of using smart contracts everywhere. For instance, smart contracts can be really useful in the spheres like payment processing, credit systems as well as content rights management. In other words, it can be all spheres where contractual agreements can be found.
Now let’s return to the sphere of cryptocurrency. The matter is that smart contracts here are apps that function on a blockchain. They run as a digital agreement. Such an agreement is always carried out by a certain number of rules. We should note that the mentioned rules are preset by computer code.
Do you like to receive marvelous news? Here it is! Smart contracts on blockchain are necessary for the creation of untrustworthy protocols. If you do not want to know somebody or just do not have ground to trust somebody, please, make commitments via blockchain easily. Smart contracts will definitely help you in it. The rule is that contracts will not be accomplished without fulfilling the conditions. Moreover, smart contracts will help to decrease operational costs, which is really one of their pros.
We should remember that various blockchains can give different methods of carrying out smart contracts.
How do smart contracts work?
We all do our work in a different manner. As far as a smart contract is concerned, it fulfills all its work as a deterministic program. It is very easy to understand. Imagine, that a smart contract will do every task as long as necessary conditions are met. Similarly to computer code, it has an ‘if…then’ structure. Smart contracts perform a bit of code. Anyway, this code works on a blockchain.
If we speak about Ethereum, here the responsibility for carrying out the blockchain operations is done by a smart contract. It occurs when people (their addresses, to be exact) collaborate with each other. We should mention here EOA, which is a short form of externally owned accounts. It is just an address that is not a smart contract. The difference is that computer code is in charge of smart contracts, while users are in charge of externally owned accounts.
Smart contracts on Ethereum include a code of contracts and two public keys. The creator of the contract gives one key and the second key will be the contract itself. It will give uniqueness to every smart contract. The deployment of any smart contract is made through a blockchain transaction, and they can only be activated when called by externally owned accounts.
Key qualities
In order to understand an Ethereum smart contract better, it is necessary to understand its main qualities. Let’s look into them.
- We can call them immutable smart contracts, because smart contracts can't be changed after being established. The possibility of deleting it will be in the case of previous implementing of some functions. Tamper-proof code can be observed in this case.
- We can call them distributed smart contracts, because such smart contracts are reproduced and shared in each node of Ethereum. Centralized systems cannot provide a similar feature, for sure. This feature helps smart contracts stand out.
- We can call them autonomous smart contracts, because smart contracts can do various tasks. In this case, smart contracts work like self-executing programs. It happens sometimes that a smart contract can become ‘dormant’ if it is not triggered. In this situation, there will be no other situations.
- We can call them deterministic smart contracts, because smart contracts only fulfill the actions they were designed to, given the requirements are met. It should also be mentioned that the end result is constantly one and the same. Who performs it really does not matter.
- We can call them trustless smart contracts, because several parties have a chance to collaborate with the help of smart contracts. They will not know or even trust one another. We can trust blockchain systems concerning accurate data and information.
- We can call them transparent smart contracts, because smart contracts are based on a public blockchain. It means that their source code can be seen by anyone if it is necessary.
In case of deploying, it becomes really impossible to attach some new functions to an Ethereum smart contract, unfortunately. If you want to delete the smart contract afterwards, please, add a function whose name is SELFDESTRUCT. It should be written in the code. Then you should replace it with a new one. Please, remember that if you cannot find SELFDESTRUCT in the code, it is impossible to delete it.
If you want to create smart contracts that have a lot of variants, it can be done without serious difficulty. For instance, just think that we can do various small contracts that are divisions of a smart contract. On the one hand, some divisions will be immutable. On the other hand, several divisions will be deleted. Consequently, some data in the code can be deleted and then replaced. Some data will stay intact.
Pros and use cases
Similarly to the computer code, a smart contract is UX-friendly. Moreover, you can design a smart contract in any way you like. There are a lot of services and solutions to any taste.
As we have already mentioned before, a smart contract is a self-executing program and it works as a decentralized system. That is why it offers big transparency and minimized operational costs. It is great to know that it totally makes efficiency bigger and more efficient. Bureaucratic expenses will become a thing of the past thanks to a smart contract.
Additionally, each smart contract can make a difference when it comes to transferring and exchanging of funds (if we have more than two parties). It is highly appropriate to use smart contracts when we would like to make tokenized assets, voting systems, crypto wallets, decentralized exchanges, different games as well as apps for computers or our phones. Nowadays we can find smart contracts in the spheres of charity, healthcare, DeFi and even governance.
Restrictions
Everybody knows that humans write computer code and a smart contract is done based on this code. Of course, there can be a lot of bugs because every human being makes mistakes from time to time. It is definitely connected with some risks. It would be very convenient if they were written by talented programmers. It is very significant when it comes to great money.
What is the main difference between smart contracts and centralized systems?
The matter is that smart contracts are working on a shared P2P, not a centralized server. It becomes almost impossible to change or delete anything in this case because of their work on a blockchain system.
One more restriction of smart contracts is connected with uncertain lawful state. Not only because it's in a gray area in most countries, but also because smart contracts do not suit the modern legal framework.
Criticism
On the one hand, from time to time smart contracts can be called one of the solutions to replacement and automatization of commercial as well as bureaucratic systems. These are the opinions of some enthusiastically tuned people. It all can occur in the nearest future, according to them. But of course it will be more likely an exception than a rule.
Without any doubt, a smart contract is an outstanding technology. After discussion of its features (they are transparent, distributed, deterministic), we can understand that smart contracts can be not very attractive in some situations.
For example, we cannot solve a lot of modern issues with the help of smart contracts. And the common services of solving our planet's problems are more popular at the present time. In contrast to smart contracts, centralized servers are dealt with much easier. It is even cheaper and more efficient.
Conclusion
Obviously, a smart contract has a great effect on the sphere of cryptocurrency. Because of smart contracts, there was a revolution on blockchains. It all hints that there will be a great number of apps in the near future in the world of financial services and even supply chain management.
Of course, these are only our human’s predictions… Nevertheless, who knows? Perhaps, one day it will be our present. Especially a happy and convenient future. Time will show.
