The Evolution of Smart Contracts

Smart contracts are written-in-code agreements between parties, such as purchasers and sellers of goods and services. These contracts are automatically executed when the specified criteria are met.

A Brief Overview: What are Smart Contracts and Why are They Necessary?

Today, there is a distinct category of attorneys specializing in the design and upkeep of contracts. These contracts are written in legalese, contain numerous pages, and are not always fully comprehended by the signatories.

Not only are traditional contracts complex to draft, but they also require the participation of other parties for enforcement. In the event of a dispute, the parties are required to apply to the courts, which consumes additional time and resources.

With the advent of the digital age, this crucial aspect of social relationships has also been influenced by digitization. Nick Szabo, a lawyer and cryptographer, defined smart contracts as “an electronic protocol for the transfer of information that assures the parties execute the conditions of the contract” in 1994.

Smart contracts, according to the concept’s creator, would enable the automatic fulfillment of transaction terms (payments, secrecy, and even enforcement of the parties’ duties) with little maintenance costs and without the need for third parties to maintain confidence. Although the technology capable of enabling smart contracts has progressed greatly since then, Szabo’s characterization of the notion remains correct.

Smart Contracts on the Distributed Ledger

In a broad sense, the first and simplest smart contract can be referred to as a protocol for conducting bitcoin transactions because it can be characterized as follows:

“Blockchain is a distributed ledger that enables people to transmit information and value without banks or middlemen.”

Bypassing centralized intermediaries, the advent of blockchain technology has enabled the creation of systems that enable the conclusion and automatic execution of transactions upon attaining preset circumstances.

The code is not susceptible to linguistic nuances and double readings, unlike the legal language of paper contracts. The parties to a transaction can be confident that the requirements set in the contract code will be carefully adhered to and cannot be modified retrospectively due to the fact that smart contracts are programs written using computer logic. This rule is stated succinctly in everyday life: “the code is the law.”

Notably, the strictness of this condition has been rigorously tested over the past year, resulting in an ideological divide in the community of the most popular Ethereum system for smart contracts today and a consequent hard fork.

However, the rejection of centralized intermediaries and the independent execution of smart contracts might greatly reduce the cost of ensuring their implementation’s integrity. Due to the fact that a single intermediary may have a vested interest in one or more outcomes of the transaction and that the stakes might be extremely large, the cost of trustee services is frequently fairly high.

Therefore, decentralized execution is a crucial characteristic of smart contracts on the blockchain. Using the same methods that communicate information about conventional transactions, a distributed blockchain network propagates the conditions essential for smart contract compliance. When computers in the network get information about the contract, each of them independently determines if the terms of the contract have been met, and then checks with the other network nodes. Since the execution of the transaction is in the hands of the entire system, no party can exert independent control over the outcome.

Drawbacks of Smart Contracts

Despite being inventive and successful, smart contracts are still a developing and imperfect technology. Like any computer program, smart contracts are susceptible to faults and programming errors.

However, despite the decentralized network’s high level of security, there are still weaknesses on the user’s end. If a user stores data on an Internet-connected device, device protection is the weakest link in their information security plan. In addition, the device or record of the key can be misplaced, in which case, in addition to the risk of hacking, you may also be unable to authenticate with the system.

In its ideal form, smart contracts totally erase the human element from the transaction; yet, this can also result in annoyance. For instance, if in the real world parties to a contract can reach an informal agreement in the event of unforeseen events, the smart contract lacks this flexibility.

Using Smart Contracts in Real World

Blockchain was created so that individuals might conduct economic transactions independent of banks and governments. Today, however, states, corporations, and banks are among the leading proponents of incorporating this technology into daily life.

Although these organizations are not interested in the full deployment of distributed ledger models, they recognize that blockchain and smart contracts can improve the productivity of even centralized organizations.

The impending era of the digital state is an illustration of the application of smart contracts in everyday life.

Elections are one of the most significant and time-consuming jobs in each nation, since it is necessary to gather and process information from millions of citizens in a very short amount of time. Even the best existing systems can fail. However, smart contracts eliminate virtually all risk from the election process.