Anyone who has spent time in cryptocurrency, blockchainand Web3 finally sees the term “smart contract“, but many people don’t know what it means. Confusingly, smart contracts have nothing to do with legal contracts, despite being inspired by them, and are fundamentally different from web apps and computer programs. Despite being the most powerful the technology that has emerged from blockchain, most people have never heard of them.
Smart contracts were first conceptualized in 1995 by Nick Szabo (who may or may not be Satoshi Nakamoto, the anonymous creator of Bitcoin), who had the idea of ”transaction protocols” that automatically executes the terms of a contract between two parties over the Internet. This would have been very useful, as smart contracts could reduce or eliminate the risk of counterparties refusing to uphold their end of a contract, avoiding costly legal battles. Unfortunately, there are no way to do this without relying on a third party to host the contract, which could potentially change or stop the code, thus rendering the idea pointless.Also, unlike cryptocurrency, digital currency is not programmable, and bank-to- bank transfers are inefficient and reversible, these limitations are why smart contracts did not exist until the Ethereum blockchain went live 20 years later in 2015.
Smart contracts are often described as ordinary contracts, but this is misleading and limiting. They are actually tiny programs running on a second generation blockchain (ie Ethereum), where crypto wallets and other smart contracts can interact with them. Almost all cryptocurrencies and NFTs are standardized smart contracts that track token balances, allowing other smart contracts to act as intermediaries or vending machines, eliminating counterparty risk during trades, transactions and distributions. Token contracts are essential to Web3, cryptocurrency and blockchain-based metaverses, as they create transferable digital property. Smart contracts can create tools, such as “airdrop” contracts that transfer tokens to many accounts simultaneously, or “multi-sig” contracts that require multiple signatures to confirm an action. Smart contracts are widely used in decentralized finance (“DeFi“), a blockchain sector that replaces regular financial applications with smart contracts, and as of November 2021, DeFi contracts were worth nearly $100 billion (according to DeFi Pulse). Smart contract options are extensive, with many more under development.
Smart contracts are very powerful, for better or for worse
Smart contracts have many functions. Websites and web apps can call smart contract functions, providing a simple interface for them. “Public” functions are open for anyone to use, while sensitive functions can be restricted to authorized users/contracts. No one can change or stop a smart contract’s functions, and crypto/NFT transfers are irreversible and take only a few seconds. They are also reliable, and will continue to run under major bottlenecks that otherwise crash cryptocurrency exchanges. Smart contracts are autonomous”residents” of the blockchain ecosystem, require no maintenance or expense once deployed, and cannot be destroyed or modified (with some exceptions).
Smart contracts have problems, like smart contract “error” accounts for billions in lost/stolen crypto over the past seven years. Because they cannot be changed, fixing a smart contract works like a manufacturer’s recall, where a new/upgraded contract is distributed and users have to manually move their tokens . Accordingly, smart contracts are developed as hardware rather than software, and professional security auditing and inspection services are often hired to find vulnerabilities before launch. Smart contracts are limited to their native blockchain ecosystem, requiring the use of “bridges” to move assets to other blockchains, making blockchain bridges big targets for hackers. Finally, smart contracts are “blind” to the real world, and must be fed data through special services, which can cause serious problems if the data is wrong (even temporarily).
Smart contracts are the most powerful technology in blockchain, giving rise to cryptocurrencies, NFTs, DeFi, Web3 apps, blockchain games, decentralized metaverses and much more. They are the engines that drive blockchain adoption forward, and get little credit until things go wrong. While their potential is huge, developers are not yet familiar with their peculiarities, as complex designs introduce more (more expensive) problems, and years of trial and error are required before blockchain smart contracts will be ready for mass adoption.
Source: DeFi Pulse
About the author
