Before we get down to business, let’s briefly talk about smart contracts, their characteristics and applications in today’s world of digital finance.
A smart contract is a computer protocol, intended to help you exchange money, shares, property or anything of value in a conflict-free digital environment. With smart contracts, the services of a middleman are obsolete, saving you time and conflict.
One of the best things about blockchain technology is that since it’s a decentralised system, existing between all permitted parties, there’s no need to pay fees to intermediaries, thus saving you time, conflict and money. Blockchain is faster, cheaper and more secure compared to traditional banking systems.
It was in the early ‘90s when a legal scholar and cryptographer, Nick Szabo, came to the conclusion that a decentralised ledger could be used for smart contracts or so-called self-executing contracts or blockchain contracts.
In his famous example, he referred to smart contracts as “vending machines”. He explained how users could input data or value and receive a finite item from a machine.
In such a format, contracts are computer codes, stored and replicated on the system. The network of computers that run the blockchain is also supervising the process. This results in ledger feedback such as transferring money and receiving the product(s) or service(s).
To sum it up:
- Smart contracts are written as codes and committed to the blockchain. The contract itself, as well as the conditions of the contract, are available publicly on the ledger.
- When a certain event outlined in the contract is triggered, for example, an expiration date or an asset’s target price is reached, the code will execute.
- Regulators can watch contract activity on the blockchain but still keep the privacy of the individual actors.
Smart contracts are useful for basically any type of arrangement between two people, including financial services, legal processes, crowdfunding activities, credit, property law and more. While a standard contract outlines the specific terms of a relationship, a smart contract enforces the relationship with a cryptographic code. Smart contracts are basically programs that execute what was asked by their creators.
For example, if you rent an apartment and wish to pay for it with cryptocurrencies, you can totally do that through a smart contract. Both the landlord and the tenant will be notified when a rental date arrives, specified by the parties.
Where do smart contracts work best?
Smart contracts work best in some industries over others due to their self-executing nature. For example, in industries like banking, health care, real estate and insurance, smart contracts are becoming more and more popular each day. Since these are industries which stand upon clear rules, algorithms and quantifiable terms, smart contracts work better for them. In comparison, smart contracts might be less suitable for industries with a more qualitative nature of service, such as food, beverages and hospitality businesses.
Smart contracts can be encoded on any blockchain. However, Ethereum is the most popular as it provides unlimited processing capabilities. Ethereum is built specifically for creating smart contracts.
Ethereum is a decentralised computing platform. It is not to be confused with Ether, which is the cryptocurrency token the platform generates. Programmers can write smart contracts on the Ethereum blockchain and the contracts will be automatically executed, according to their code and the way they were programmed.
How does it work?
It’s worth mentioning that though Bitcoin was the first to support basic smart contracts (in the sense that one person can transfer value to another in the network), Bitcoin is limited to the currency use case.
In comparison, Ethereum has replaced Bitcoin’s restrictive language with a language that allows developers to write their own programmes.
The term “smart contract” is often used as a substitute for Ethereum scripts because it’s mostly associated with this platform.
Basically, on the Ethereum platform, developers can programme their own smart contracts or so-called “autonomous agents”. The language supports a broader set of computational instructions, making it easier for programmers.
The whole structure of Ethereum smart contracts, combining programming language, platform development and verification by a great number of connected computers ensures that smart contracts are safe, trustworthy, open and with little to no probability of any possible mistakes.
Most people are aware of the Ethereum project because of the token, Ether.
However, many are not aware that this is one of the most successful startups in the last two decades. It also became the world’s leading smart contract platforms, chosen by most developers.
Since the platform went live in July 2015, it has grown by leaps and bounds and right now, it can facilitate smart contracts for everything from online games to ICOs. The majority of ICOs are now using the ERC-20 token standard to facilitate their offering.
What is the secret to Ethereum’s smart contract platform and why is everyone calling it the king of smart contracts?
Let’s start by introducing two very important concepts you need to understand before working with Ethereum - Ethereum Virtual Machine and gas.
- Ethereum Virtual Machine: It’s the platform where smart contracts run in Ethereum. In terms of scripting, it provides a more expressive and complete language than Bitcoin. Think of it as one global computer where smart contracts are executed.
On the EVM platform, there’s a mechanism set to limit the resources used by each contract. Every operation executed on the EVM platform is simultaneously executed by every node on the network. That’s the reason why gas exists.
- Gas: A transaction contract code can do several things: make calls or send messages to other contracts, do expensive computations, trigger data reads and writes, etc. Each one of these operations must be paid in Ether, based on a gas/Ether price, which does change quite often. The price is usually deducted from the Ethereum account that sends the transaction. The transactions also have a gas limit which showcases how much gas the transaction can consume. It serves the purpose of a safe-guard against errors. You can read more about gas here.
Let’s talk more about Ethereum platform and their smart contract advantages.
Apart from having the biggest market capitalisation among all the other smart contract platforms out there, the beauty of the platform is the degree of standardisation and support it offers. There’s also a set of clear rules for developers to follow, making Ethereum smart contract development quite easy and less risky.
In terms of support, Ethereum is constantly updating and improving the way that their smart contracts are created and operated.
Let’s outline some of the best Ethereum smart contract platform features that make it so popular among programmers:
- Own smart contract programming language, named Solidity.
- Free to set up your smart contract. Smart contract transactions are charged in gas, which is the initial pricing for running a transaction or contract in the Ethereum platform.
- There are clear guidelines and rules for developers.
- Long list of literature and support available.
- ERC-20 technical standard, used on the Ethereum blockchain for implementing tokens.
- Cutting-edge technology, incorporating core blockchain benefits, such as security, decentralisation, fast transactions and immutability.
What makes Ethereum's smart contracts so valuable?
Ultimately, the power of the Ethereum blockchain is its programmability.
The reason why Ethereum is the best option for executing smart contracts is because agreements are embedded in the code itself so that transactions automatically execute.
Ethereum’s digital agreements or “smart contracts” as everyone calls them, have limitless formats and conditions. In addition, smart contracts can even call on other contracts, making Ethereum useful for payment settlement as well as for arbitration of transactional events in real estate, law, government registries, energy grids, trade finance and many other sectors.
A special feature of how smart contracts work on Ethereum platform is that each one has their own address on the blockchain. This means that the corresponding code is not listed into each contract; instead, a note launches a transaction which creates and attaches a unique address to each contract. After the primary transaction, the smart contract turns into an inseparable unit of the blockchain and its address never changes. After that, the smart contract will “act” non-stop till it reaches the gas limit or till the successful end of the operation.
So far so good. Keep in mind, though, that smart contracts are still new technology. Whether we talk about the Ethereum platform that basically dominates the smart contract blockchain industry, or another smart contract platform, there are problems that can arise.
One of the drawbacks of smart contracts is that they have to contain zero bugs in order to properly conduct the activities they are programmed to do. These bugs can be exploited by scammers and money can be stolen.
Governments are also trying to intervene, questioning what will happen if something unexpected happens or the contract can’t get access to the subject of the agreement.
With traditional contracts, the court will be involved. However, with smart contracts, “Code is Law”, meaning that the contract will perform no matter what.
The issues that accompany smart contracts will, most probably, be resolved in time, as this is relatively new technology. There’s room for perfection but financial experts agree that they will become an integral part of our society and Ethereum will continue to lead the bunch.
Some other drawbacks to the Ethereum platform include:
- It’s more expensive than other platforms;
- Ethereum network overloads quite frequently: most of the time, the network runs at 100% capacity. Application developers worry that their contracts will not always be able to get processed as quickly as they desire.
- Security: poor quality smart contract codes are exposed to hackers. A recent study found out that more than 30,000 Ethereum based smart contracts are vulnerable to bugs and consequently, hacks.
Is it possible to develop smart contracts without Ethereum?
In comparison to smart contracts performed on Ethereum network, cryptocurrency platforms like Obyte offer a different type of smart contract which is already attracting the attention of users. Obyte is a platform, built on a DAG (directed acyclic graph) protocol which challenges Ethereum with its human-readable smart contracts, which are also called smart-addresses. They are called this because they are shared addresses with a set of conditions that must be met in order to transfer funds out of them.
Obyte offers a platform for simple, human-readable contracts, performing simple actions. While Ethereum performs more complicated, programmer-readable contracts that carry out complex actions.
Alternative platforms and new ways to programme a smart contract will be available in the future, that’s for sure. In order to become more accessible to everyday people, smart contracts will develop further, without doubt, say experts.
We’ve talked about the nature of smart contracts and the Ethereum platform which is where the magic happens. Though complicated and requiring a certain level of knowledge, Ethereum contracts are actually considered the future of cryptocurrency, performing all the functions of the blockchain with ease.
Ethereum gives more opportunities for coding various smart contracts, as compared to other platforms. You can pretty much implement any scenario. If you want to build a decentralised exchange, Ethereum is the platform to turn to.
Do Ethereum smart contracts have any future?
It’s safe to say that blockchain, Ethereum and smart contracts will further develop and transform the financial industry as we know it. Only time will tell what to expect and how to adapt as consumers.