What are blockchain-based smart contracts?

Smart contracts Development represent a next step in the progression of blockchains from a financial transaction protocol to an all-purpose utility. They are pieces of software, not contracts in the legal sense, that extend blockchains’ utility from simply keeping a record of financial transaction entries to automatically implementing terms of multiparty agreements. Smart contracts are executed by a computer network that uses consensus protocols to agree upon the sequence of actions resulting from the contract’s code. The result is a method by which parties can agree upon terms and trust that they will be executed automatically, with reduced risk of error or manipulation.

How Do Smart Contracts Work?

Like any other contract, a smart contract is a binding contract between two parties. It uses code to take advantage of the advantages of blockchain technology, thereby unlocking greater efficacy, openness, and confidentiality. The execution of smart contracts is controlled by relatively easy “if/when…then…” statements written in code on the blockchain.

These are the steps needed for the functioning of smart contracts.

• Agreement: The parties wanting to conduct business or exchange products or services must concur on the arrangement’s terms and conditions.
• Contract creation: Participants in a transaction may create a smart contract in many ways, including building it themselves or collaborating with a smart contract provider. The provisions of the contract are coded in a programming language. 
• Deployment: When the contract has been finalized, it must be published on the blockchain. The smart contract is uploaded to the blockchain in the same way as regular crypto transactions, with the code inserted into the data field of the exchange. 
• Monitoring conditions: A smart contract runs by tracking the blockchain or a different reliable source for predetermined conditions or prompts. These triggers can be just about anything that can be digitally verified, like a date attained, a payment made, etc.
• Execution: When the trigger parameters are met, the smart contract is activated as per the “if/when…then…” statement. This may implement only one or multiple actions, like passing funds to a vendor or registering the buyer’s possession of an asset.
• Recording: Contract execution results are promptly published on the blockchain. The blockchain system verifies the actions taken, logs their completion as an exchange, and stores the concluded agreement on the blockchain.

Types of Smart Contracts: 

• Smart legal contract

Smart contracts are guaranteed by law. They adhere to the structure of legal contracts: “If this happens, and then this will happen.” As smart contracts reside on blockchain and are unchangeable, judicial or legal smart contracts offer greater transparency than traditional documents among contracting entities.The parties involved execute contracts with digital signatures. Smart legal contracts may be executed autonomously if certain prerequisites are fulfilled, for example, making a payment when a specific deadline is reached. 

•  Decentralized autonomous organizations

DAOs are democratic groups governed by a smart contract that confers them with voting rights. A DAO serves as a blockchain-governed organization with a shared objective that is collectively controlled. No executive or president exists. Instead, blockchain-based tenets embedded within the contract’s code regulate how the organization functions and funds are allocated.

• Application logic contracts

ALCs, or application logic contracts, consist of application-based code that typically remains synced with various other blockchain contracts. It enables interactions between various devices, like the Internet of Things (IoT) or blockchain integration. 

Benefits and Challenges of Smart Contracts

Benefits of smart contracts

• Single source of truth

Individuals have the same data at all times, which reduces the likelihood of contract clause exploitation. This enhances trust and safety because contract-related information is accessible throughout the duration of the contract. 

• Reduction in human effort

Smart contracts don’t need third-party verification or human oversight. This provides participants autonomy and independence, particularly in the case of DAO. This intrinsic characteristic of smart contracts offers additional benefits, including cost savings and faster processes.

• Prevention of errors

A fundamental prerequisite for any contract is that every term and condition is recorded in explicit detail. An omission may result in serious issues in the future, including disproportionate penalties and legal complexities. Automated smart contracts avoid form-filling errors. 

• Zero-trust by default

The entire framework of smart contracts is a step beyond conventional mechanisms. This implies that there’s no need to rely on the trustworthy conduct of other parties during a transaction. A transaction or exchange does not necessitate faith as a fundamental component, consistent with zero-trust security standards.

Challenges of smart contracts

Rigidity and inconsistent support

Modifying smart contract protocols is nearly impossible, and fixing code errors can be costly and time-consuming. Even if smart contracts conform to the laws of different countries, it might be tough to guarantee that they are adhered to globally.

•  Difficulty in capturing unquantifiable data

For businesses with quantifiable data, such as finance and agriculture, it is relatively simple to put together smart contracts. However, not all industries use quantifiable metrics, like scenarios where creative work has to be evaluated.

• Conflict with GDPR

The General Data Protection Regulation (GDPR) guarantees the right to be forgotten by its citizens. They can request that digital data about them be deleted. Nevertheless, if a digital legal contract binds an individual, it cannot be erased or redacted.

• Skills shortage

The creation of smart contracts demands expertise in software engineering. Smart contract development is distinct from traditional software development in that it requires coders with organizational expertise and comprehension of non-traditional programming languages such as Solidity. 

Advantages of Smart Contracts

• Security

The blockchain’s encrypted transaction records are almost hack-proof. Additionally, with a distributed ledger, hackers will need to modify the whole chain to change a single entry  by developing an EdgeChain model, indicated the security advantages of smart contracts and blockchain with fair cost.

• Confidence and openness

There is no need to worry that information has been changed for nefarious purposes since there is no middleman and participants exchange encrypted records of transactions. Nugent  demonstrated that blockchain-based smart contracts provide an innovative technical solution to the issue of data tampering by supplying an immutable record of experimental history and serving as trusted administrators.

• Accuracy, efficiency, and rapidity

As soon as a condition is satisfied, the contract is instantly executed. There is no paperwork to handle and no time wasted correcting mistakes that often occur from manually filling out documentation due to the digital and automated nature of smart contracts. 

• Applications

Smart contracts have many potential applications in industries including healthcare, supply chains, energy, etc. The development of smart contracts may automate procedures in many types of sectors. They offer the data accessibility necessary to provide a service when requested.

• Usability

In contrast to conventional contracts, smart contracts are not adaptable with exceptions such as bugs since they are logic-based computer programs with a limited amount of interaction. They also do not enable individuals to discuss and make changes based on subsequently approved revisions. 

Use Cases of Smart Contracts

There are various Smart contracts use cases across different industries. Some of the popular ones include:

• Supply Chain Management: Smart contracts can track and verify the movement of goods, ensuring transparency and reducing fraud in supply chain processes.
• Financial Services: Smart contracts enable automated and secure transactions, eliminating the need for intermediaries in areas such as lending, insurance, and crowdfunding.
• Real Estate: Smart contracts streamline the process of property transactions, ensuring transparency and reducing the time and cost associated with traditional methods.
• Healthcare: Smart contracts can facilitate secure sharing of patient data between healthcare providers, ensuring privacy and interoperability.
• Voting Systems: Smart contracts can be used to create transparent and tamper-proof voting systems, enhancing the integrity of elections.

Conclusions

The decentralization, auto-enforcing ability, and verifiability characteristics of Smart contracts Development enable their encoded business rules to be executed in a peer-to-peer network, where each node is “equal” and none has any special authority without the involvement of a trusted authority or a central server. Thus, smart contracts are expected to revolutionize many traditional industries, such as finance, healthcare, energy, etc. Not only are they commonplace in business and commerce, but they also play an important role in many other spheres of human interaction.