A legal contract is nothing but a promise that is mutually agreed upon and enforceable by law. It is a legal agreement where two or more parties agree to do something or to refrain from doing certain things. Usually, these contracts are enforced by a third party like a lawyer or the government to make sure they don’t violate the terms of the agreement. Contrary to traditional contracts, there is a new kind of contract, called the ‘Smart Contract’ that is gaining in popularity and application.
A smart contract is a computer program that is stored and executed on a blockchain network. It contains a set of rules and conditions that are encoded into the program’s logic, and when certain conditions are met, the program is automatically executed without the need for human intervention.
Let’s learn more about them.
What is a smart contract?
A smart contract is like any other contract except that it is entirely digital. Terms of the agreement are written in the format of a computer program that is stored in a blockchain (such as Ethereum). You can think of it as an if-else block of code. When some predefined conditions are met, the code executes and performs activity as per the contract. This allows two or more parties to come to an agreement without any middleman. Besides, as these smart contracts run on a blockchain, they are secure, immutable, reliable, and accessible from anywhere.
How do smart contracts work?
A smart contract is a piece of code written in “if/when…then…” format and stored in a blockchain network. Each node in the blockchain has a copy of the smart contract which is completely transparent and publicly verifiable. This allows anyone on the network to review the contract’s code and current state.
At the core, smart contracts facilitate three functions:
- They store rules
- They verify rules
- They self-execute rules
When some predefined conditions are met, the smart contract executes automatically, and certain transactions are made as per the rule of the contract. The new state of the contract and the transaction details are added to the blockchain ledger irreversibly. This allows multiple parties to come to an agreement without the need for a third party. You don’t need to trust somebody because there is nobody. It is all automated as per the business rule. No one can alter the code of a smart contract.
A good analogy can be drawn with a secure vending machine. Every vending machine stores some rules. For example, if the user inserts a dollar, he gets the snack. So when you go and insert a dollar into that vending machine, it verifies the amount. If the amount is correct, it executes the program and dispenses the snack of your choice. That is kind of how smart contracts work at a high level.
Which blockchain networks support Smart Contracts?
Right now, the most popular blockchain for running smart contracts is Ethereum. Other blockchain networks that support Smart Contracts include EOS, Neo, Tezos, Tron, Polkadot, and Algorand.
Which programming language is used to write smart contracts?
In the Ethereum blockchain, smart contracts are written in Solidity programming language, which is similar to JavaScript. Some other popular programming languages include: Rust(Solana, Polkadot), Vyper(Ethereum), Yul, JavaScript (NodeJS) for NEAR, C++ (EOS)
Key advantages of smart contract:
- Smart Contracts are immutable: Once a smart contract is stored in a blockchain ledger, it stays in the blockchain forever. Due to the decentralized and distributed nature of blockchain, it cannot be altered or deleted. This ensures integrity and prevents any tampering with the code.
So, in case of any bug or inefficiency, instead of fixing the existing contract, developers create a new contract and ask users to use the new one. - Transparency: Smart contract codes are completely transparent and publicly verifiable. This allows anyone on the network to review the contract’s code and current state. So, there is no scope for ambiguity or false claims.
- No Intermediatory: Smart contracts execute by themselves once the required conditions are met. So, it does not require any third parties or human intervention.
- Cost reduction: As smart contracts do not require any intermediatory, all the costs associated with hiring a lawyer, legal consultations, court proceedings, or paperwork are also eliminated. Only a small gas fee needs to be paid to execute the smart contract. This makes them extremely cost-effective.
- Fast Execution: Smart contracts execute in a matter of minutes or even seconds once the conditions are met. In the case of a regular contract, it may take many days or even months to settle disputes or process claims.
- High availability: Once the smart contract is stored in a blockchain, it stays there forever. It is copied across all the nodes in the network. So, it is almost impossible to delete the contract.
Limitations of smart contracts:
- Difficult to fix error: Due to the immutable nature of the smart contract, it is not possible to alter the code, not even by the creator. So, there is no scope for any bug fixes or code enhancement. In such cases, the developer needs to create a new contract and ask users to use the new one.
- Complexity: Smart contracts can be complex and difficult to understand, especially for non-technical users. This can make it challenging for businesses and organizations to adopt them.
- Security: While smart contracts are designed to be secure, they are still vulnerable to attacks and exploits. In particular, smart contracts can be vulnerable to programming errors or bugs that can be exploited by attackers.
- Cost: Smart contracts can be expensive to deploy and execute, especially on public blockchain networks. This can make it challenging for smaller organizations and individuals to use them.
- Legal and regulatory issues: The legal and regulatory status of smart contracts is still uncertain in many jurisdictions. This can make it challenging for businesses and organizations to use them in certain contexts.
Conclusion:
Smart contracts are computer programs that operate on a blockchain network and are designed to automatically execute when certain conditions are met. They are transparent, immutable, and self-executing, which makes them ideal for a wide range of applications where trust, transparency, and automation are essential. Smart contracts have the potential to transform industries and enable new forms of decentralized applications and services, including decentralized finance, supply chain management, and voting systems. As blockchain technology continues to evolve and become more widely adopted, smart contracts are likely to play an increasingly important role in shaping the future of digital transactions and interactions.
