Smart Contracts
Introduction
A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized network. Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism.
History and Development
The concept of smart contracts was first proposed by Nick Szabo, a legal scholar and cryptographer, in 1994. Szabo realized that a decentralized ledger could be used for smart contracts, otherwise called self-executing contracts, blockchain contracts, or digital contracts. In this format, contracts could be converted to computer code, stored and replicated on the system and supervised by the network of computers that run the blockchain.
Functionality
Smart contracts help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman. The best way to describe smart contracts is to compare the technology to a vending machine. Ordinarily, you would go to a lawyer or a notary, pay them, and wait while you get the document. With smart contracts, you simply drop a cryptocurrency into the vending machine (i.e., ledger), and your escrow, driver’s license, or whatever drops into your account.
Advantages of Smart Contracts
Smart contracts offer a number of advantages over traditional contracts:
- Autonomy: You’re the one making the agreement; there’s no need to rely on a broker, lawyer or other intermediaries to confirm. Incidentally, this also knocks out the danger of manipulation by a third party, since execution is managed automatically by the network, rather than by one or more, possibly biased, individuals who may err.
- Trust: Your documents are encrypted on a shared ledger. There’s no way that someone can say they lost it.
- Backup: Imagine if your bank lost your savings account. On the blockchain, each and every one of your friends has your back. Your documents are duplicated many times over.
- Safety: Cryptography, the encryption of websites, keeps your documents safe. There is no hacking. In fact, it would take an abnormally smart hacker to crack the code and infiltrate.
- Speed: You’d ordinarily have to spend chunks of time and paperwork to manually process documents. Smart contracts use software code to automate tasks, thereby shaving hours off a range of business processes.
- Savings: Smart contracts save you money since they knock out the presence of an intermediary. You would, for instance, have to pay a notary to witness your transaction.
- Accuracy: Automated contracts are not only faster and cheaper but also avoid the errors that come from manually filling out heaps of forms.
Limitations and Challenges
Despite the numerous advantages, smart contracts also face several significant challenges and limitations:
- Lack of regulation: The lack of a legal framework governing the use of smart contracts is one of the biggest challenges. This lack of regulation raises questions about the legal validity of smart contracts and the recourse available to parties in the event of a dispute.
- Coding errors and bugs: Smart contracts are only as good as the people who code them. Coding errors and bugs can lead to unintended consequences, and because smart contracts are immutable, these errors cannot be easily corrected once the contract is deployed.
- Lack of flexibility: Smart contracts are designed to execute exactly as they are coded, which leaves little room for flexibility or adaptation to changing circumstances.
- Privacy concerns: Because smart contract transactions are visible to all participants on the blockchain, there are potential privacy concerns for businesses and individuals.
Future of Smart Contracts
The future of smart contracts is largely tied to the broader adoption of blockchain technology. As more industries and governments recognize the benefits of blockchain, it is likely that the use of smart contracts will increase. Potential applications of smart contracts include everything from real estate transactions to supply chain management to voting systems.