Cryptocurrency is just one of the many applications of the revolutionary decentralization-focused technology called Blockchain. Smart Contracts are one such application of this red-hot tech.
Smart Contracts and Blockchain: Understanding The Connection
To understand smart contracts, you must know their underlying crux i.e. Blockchain. Don’t be intimidated by the technical terms. They get easier as you read. Blockchain technology is based on the concept of decentralized data storage and transactions where you don’t depend on a single server but a sequence or chain of nodes. Each one of these nodes (called a block) acts as a small server in itself thus creating a decentralized network and removing the need for a central server.
But the most interesting part of this technology is not the decentralization itself. Each transaction in a blockchain is secure despite the fact that every node contains some part of it. It is somewhat like a jigsaw puzzle. You cannot get the whole picture unless all pieces come together in a very specific manner. In blockchain, this is achieved by a private key. Such a key is unique for every user in a blockchain. This security feature allows for irreversible records of transactions without a central authority for validation.
What Are Smart Contracts and Why We’d Ever Need Them?
Smart contracts are, of course, contracts to begin with but with the difference that they are based on blockchain technology. But here’s how they are different from the regular contracts.
- They are digital contracts that are self-executing.
- These contracts are represented by a software program stored inside a blockchain.
- This software (secure code) contains the terms of agreement held between the transacting parties.
- This code/software exists across a distributed, decentralized blockchain network.
In smart contracts, this code is what controls the execution of each transaction. The verification of the fulfilment takes place automatically through the code when the agreed terms are executed as per the terms of the agreement. Each transaction is traceable, transparent and irreversible.
This feature of smart contracts enables trusted transactions and agreements among distinct and anonymous parties without a central legal system/government/court. This is clearly a dynamic shift from the age-old need a third party authorization for establishing business relations. Smart contracts can enable parties to make an agreement that can transact directly with each other.
Interestingly, blockchain technology can also enable a smart contract to receive funds until a goal is reached. This can allow for smooth and obstacle-free crowdfunding actions.
Why Smart Contracts Are Worth Adopting In The Mainstream?
- Decentralization of authority: An execution without the third-party involvement would mean a lot of saving on time and lowering of the risk of data breach.
- Fast and accurate execution: Since they are preformulated and computer-generated, the accuracy of the execution of smart contracts is higher.
- Lower risks due to low human involvement: Since they’re stored on a blockchain accessible only to the involved parties, the chance of externally-introduced error/corruption of terms decreases significantly. Also, if one (or more) of the parties break the terms of agreement, appropriate action is automatically generated.
Smart contracts will be applicable in a variety of scenarios ranging from personal transactions between two people to public sector dealings as well. Industries such as supply chain, media and entertainment, real estate and a variety of financial services can benefit from the execution efficiency that smart contracts promise to offer.
Do Smart Contracts Have Any Shortcomings At All?
You might have your questions about smart contracts. Many may still prefer to go for a traditional contract despite the ease and safety of smart contracts given that the latter is slightly more complex to understand.
Also, smart contracts may not be a foolproof solution. There are aspects and issues that they cannot address. There is a possibility that an advantage can turn into a disadvantage. Take the immutability factor for example. If the underlying coding is faulty, it would not only take a long time to correct the code but also cost heavily to correct the code. There are more such concerns that come with smart contracts.
- Speed and Scalability: The transaction processing speed and scalability of the underlying technology of smart contracts (i.e. blockchain) is expected to be one of the major issues due to its fundamental complexity.
- Costly implementation: Since smart contracts are heavily dependent on robust coding and testing, it would require trained, experienced and dedicated programmers to deftly employ the blockchain technology in the execution of the terms of smart contracts accurately.
- Regulations: Governments haven’t begun to regulate smart contracts as of now but once they do, it may lead to further complication of formation and use of smart contracts.
And of course there is the question about the presence of the third party that the smart contracts are otherwise meant to leave behind. No matter how sound a smart contract may be technically, the two parties will still have to consult a third party (such as a lawyer) for laying down the terms of the agreement. This can put a big question mark on the whole purpose of having smart contracts.
Where Do We Stand On Smart Contracts?
While smart contracts could prove a big gamechanger in the near future, it must not be forgotten that governments and legal systems across the world must prepare well in advance to deal with the massive challenges that this change would bring.
It’s highly likely that smart contracts will enter the mainstream for their higher efficiency over traditional contracts but the accompanying challenges will definitely affect the transition to a certain extent. In the meantime, it’ll be best to educate oneself with the upcoming technological trends and their impacts.