And What Do They Have to Do with Blockchain?
Imagine being able to create a contract that forms a secure and automatically enforced agreement, with someone anywhere in the world, and without needing to hire a lawyer, use a bank, or complete stacks of paperwork. This is what smart contracts do: they digitally process contractual agreements through a secure, self-executing program with a pre-set series of benchmarks. They allow for an anonymous yet transparent binding agreement between two parties anywhere in the world. By removing the human intermediary in the execution of a contract, they make the process less expensive, less-prone to contract violations (the consequences are pre-determined) and with the potential of a near instantaneous completion. Having evolved as an application of blockchain technology (they are, therefore, a type of decentralized app, or DApp), smart contracts are part of the cryptocurrency revolution we are living right now.
The term smart contract was coined in 1994 by Nick Szabo: a legal scholar and cryptographer. In 2009, Bitcoin became the first virtual currency to adopt blockchain technology and allow for smart contracts. As altcoins (all digital currencies after Bitcoin) arose, they created new possibilities for smart contracts. The most significant, and the reason this is being discussed here by the HBUS digital currency marketplace, is Ethereum. It is, in short, the “smarter contract” digital currency, created specifically for smart contract extensibility. It uses its own decentralized Turing-complete virtual machine, the Ethereum Virtual Machine (EVM), meaning that the entire network acts like a computer and offers a huge selection of computational functions compared to the limited scripts offered by Bitcoin.
Smart contracts are used exclusively to exchange digital assets, and usually, but not always, a digital currency. Although the majority of smart contracts run on the EVM, the digital assets transferred by smart contracts can be any type that assign ownership to the receiver and are not necessarily transferring Ethereum tokens. Value and/or assets can be transferred before, during or after conditions of the contract, or be held in escrow while the contract is being executed.
The contracts function on “if-then” conditions: if a current condition of the contract is met it will be advanced to the next, if any, or finalize the contract with the digital exchange. For example, 100 Bitcoin being sent to a designated wallet, or intellectual property rights being assigned. The maker of the contract creates the conditions of the execution based on the agreed upon terms of the parties involved. In order to advance the contract, the information must be digitally available. Smart contracts are, by definition, not waiting for additional direct human input. One or more of a multitude of triggering events such as date, time, payment confirmation, a particular currency price (crypto or fiat), etc. are able to tell the contract to automatically proceed.
The blockchain network, in this case Ethereum, processes the transactions from start to finish and adds them to the database. The more complex a smart contract is, the more blockchain processing bandwidth is required and the more Ethereum is allocated to those handling the transactions. As smart contracts and DApps become more numerous, the processing load is generally expected to increase which may affect the price of Ethereum. In fact, the massive jump in value of ETH in 2017 is attributed to its innovative approach to smart contracts and anticipated future demand.
As mentioned earlier, smart contracts are designed to offer an unprecedented level of non-interference and security. They are coded contracts but only as good as the coding behind them, and are not perfectly secure. In 2016, the Ethereum DAO experienced a painful lesson to the tune of a $50 million potential loss of Ether due to a poorly written smart contract. To avoid the loss, the Ethereum blockchain went through a hard-fork that gave birth to a competing cryptocurrency, Ethereum Classic. So, it is worth mentioning that, although lawyers and banks are being cut out of this digital contract equation, a new player — the smart contract writer — is required, and they currently command a tidy sum for their work. However, software is rapidly being created that lets less-experienced coders use preexisting blocks of code to assemble their own contracts.
