Blockchain Smart Contracts – Reasons and Applications

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Smart contracts are computer programs that can automatically execute actions according to the terms of a contract or agreement. They are designed to reduce the involvement of intermediaries, and lower down enforcement costs.

Vending machines can be considered to be the oldest example of a kind of a smart contract. They are a piece of technology that works on a set of rules, whenever a user enters the true money for any beverage of their choice, the machine considers that they have upheld the contract, and in exchange vends the beverage of choice.

Earlier you would have to go to a lawyer, or a notary, pay them and then wait to get legal documents. However, with smart contracts you can simply drop a bitcoin in the vending machine (or ledger in this case) and receive the documents.

Blockchain and smart contracts

Smart contracts operating on a blockchain are designed such that the code and the agreements exist across the decentralized blockchain network. The code is responsible for controlling the execution of transactions, which can be tracked as well. However, these transactions are irreversible.

Smart contracts allow reliable and secure execution of agreements and transactions among anonymous users without needing any central authority or legal system whatsoever.

History of Smart Contract

In 1994, Nick Szabo, an American computer scientist, proposed smart contracts and then invented a virtual currency called “Bit Gold” in 1998. He defined smart contracts as computerised transaction protocols that are capable of executing terms of a contract.

Working of Smart Contract

In the whitepaper published by Szabo, he proposed the execution of a contract for synthetic assets like bonds, options, and futures. Basically, complex term structures for payments can be transformed into a standardized contract that can be traded with low transaction costs because of computerized analysis of these structures.

Smart contracts follow the “when… then…” statements written into the code of blockchain. A network of computers executes the actions when some preset conditions have been met and verified. The blockchain is updated when the transaction is complete. Hence, this transaction cannot be modified and only the concerned parties can see the results.

Terms of the contract can be established when the participants have agreed how the transactions and related data will be represented on the blockchain. They must also have agreed on the rules that govern the transactions, and explored all possible exceptions, in order to define an iron-clad framework for conflict resolution.

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smart contracts

Operational process of smart contracts

A smart contract is supposed to store information, process inputs, and produce outputs on the basis of predefined functions. Hence, it is kind of a common agreement between two or more parties.

Smart contracts often include state variables, functions, function modifiers, events and structures needed for execution and control of events depending on the contract terms. They also have the ability to call or link to other smart contracts. They have states which are variables holding data (like the owner’s wallet address to deploy the smart contract in), the state could be constant or writable, smart contracts also have functions which are long codes capable of reading/modifying states.

A smart contract is hosted on a blockchain by invoking the constructor function which is executed and the final code of the contract is stored on the blockchain. Once deployed, users can then invoke any available smart contract function by sending a transaction.

Platforms for Smart Contracts

Smart contracts can be developed and deployed in different blockchain platforms (e.g., NXT, Ethereum, and Hyperledger Fabric). Several platforms offer a multitude of features for developing smart contracts.

1. Bitcoin is a public blockchain platform preferred for cryptocurrency transactions. Since it has very low computing capability, creating smart contracts with rich logic is tough on the Bitcoin scripting language.

2. NXT is an open-source blockchain platform that relies entirely on a proof-of-stake consensus protocol. However, customized smart contracts cannot be employed and users will have to choose from an existing set of templates

3. Ethereum was the first blockchain platform for developing smart contracts. It supports advanced and personalized smart contracts with the help of the Ethereum virtual machine (EVM), where smart contracts are written in the language Solidity. It is currently the most popular development platform for smart contracts and is also used to design various kinds of decentralized applications (DApps).

How to develop a smart contract?

Smart contracts used to be programmed by developers, however lately organizations that rely on blockchain for business have started providing templates, web interfaces, and other online tools to make the process much easier and cost-efficient.

Benefits of smart contracts

1. Efficiency: Blockchain smart contracts are executed immediately once the conditions are met, hence they work very fast. The lack of paperwork because of digital contracts further increases the efficiency, and accuracy of the process

2. Security: Blockchain transaction records are heavily encrypted and thus, hard to hack. Moreover, if a single block is altered then the entire subsequent chain breaks which makes blockchain much more secure than most other technologies.

3. Transparency: All transactions on a blockchain protocol are shared across the participants in an encrypted format, which makes the process of transparent and reliable.

4. Cost-efficient: Smart contracts were designed to omit unnecessary intermediaries, and reduce transaction costs and hence, are quite pocket-friendly since there are no time delays and lesser fees.

Features of Smart Contract

1. Reliability: The smart contract can’t be lost as it’s embedded in the blockchain itself.

2. Accuracy: Smart contracts are accurate to the extent of the accuracy of the code.

3. Efficiency: The lack of human intermediation in the entire process makes it way faster and more efficient.

4. Backup: Since every node in the network has access to the ledger, there is always a backup for the data.

5. Autonomy: The decentralization and lack of any third party allow the full authority to the dealing parties.

6. Safety: All blockchain transactions are secured due to cryptographic hashing and hacking a blockchain is practically impossible.

7. Savings: The lack of intermediaries also makes smart contracts very cost-efficient. Also, there is almost no money spent on paperwork!

Advantages of Smart Contracts

1. Database Management: A blockchain stores all transactions chronologically and any transaction can be accessed easily making database creation and management easier and more secure.

2. Direct Marketing: The lack of intermediaries allows direct, transparent relationships and communication with customers.

3. Reduced Frauds: Since smart contracts are stored in a blockchain which are almost impossible to modify, there is almost no chance of fraud.

4. Resistance to failure: A contract failure is less probable now because no single individual owns the asset, and even if one node backs out or is not on the platform, the contract remains intact.

5. Enhanced reliability: The peer-to-peer network and decentralization features of blockchain, allows smart contracts to be transparent and free from the control of any entity. It is also encrypted and thus, secure thereby, being more reliable.

6. Pocket friendly: Since smart contracts do not involve any third parties or intermediaries and there is almost no paperwork, the process is quite cost-friendly.

Use Cases of Smart Contracts

1. Medical efficacy: Blockchain technology is making waves in the healthcare sector. It can drastically enhance the efficiency of supply chain management by increasing transparency, and this benefit is used as an application to ensure and track temperature-controlled pharmaceuticals to provide safe, reliable and accurate data to multiple parties.

2. Ensuring trust: Real-time communication and increased transparency into the supply chain has allowed stronger relationships between retailers and suppliers, resulting in quality work and faster conflict resolution.

3. International trade: Many international corporations have shifted to use a blockchain-based trading platform that relies on standardized rules with simplified trading options in order to make the process easy and smooth for all parties involved.

4. Real Estate: Now that there are no intermediaries involved in smart contracts money paid to middlemen is reduced drastically, making payment easier and quicker.

5. Music: The music industry could record the ownership of music in a blockchain and a smart contract can be embedded into that. So that the owner gets royalties whenever that song is used for commercial purposes.

6. Government elections: If the votes are entered into a blockchain, they will be almost impossible to decrypt or modify leading to honest elections.

Limitations of Smart contracts

1. Smart contracts are not “aware” and cannot get information about real-world events as they cant send HTTP requests.

2. Smart contracts are limited by their maximum contract size. They cannot exceed 24KB or they will render useless.

Smart Contracts vs Smart legal contracts

Smart contracts differ from smart legal contracts because the latter relies on a natural language legally-binding agreement with certain terms implemented in a machine-readable code.

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2 Responses

  1. David Henry says:

    Once the smart contracts deploy, you cannot to do the changes in the code. Before making your smart contracts code live hire a third party to audit your code. For the smart contract auditing you can visit

  2. walter miller says:

    Very Informative for a Complete novice like myself ..Thank You

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