What Are Smart Contracts And What Are They Good For?
Smart contracts are a major feature of the blockchain ecosystem. In fact, it could be argued that smart contracts are the most sought-after blockchain-based innovations today.
This article will explain what smart contracts are, how they work and the impact they have on the blockchain sector and the greater business community.
A Brief History
Prior to July 2015, the blockchain sector was focused primarily on digital currencies, which provided a decentralized medium of exchange that enables users to conduct borderless, low-cost financial transactions without the need of a traditional financial intermediary.
However, on July 30, 2015, the Ethereum blockchain was launched. The launch of the Ethereum blockchain — founded by Vitalik Buterin — is considered to be the beginning of the blockchain 2.0 age. This distinction is made because the project differed significantly from its forefathers as it expanded on the features present in prior digital currency projects to include smart contracts. That is why Ethereum is also referred to as a blockchain-based smart contract computing platform.
Ethereum’s ability to execute smart contracts combined with the immutable and decentralized design of the Ethereum blockchain quickly catapulted the project to the forefront of the cryptocurrency sector.
Defining Smart Contracts
Smart contracts are defined as self-enforcing agreements, powered by software. The software replaces the human components of a regular contract. This means that that human beings do not have to spend time and resources to execute the terms of the agreement. Rather, the smart contract is able to independently follow a pre-determined course of action in the event of a number of outcomes.
The self-enforcing aspect of these innovations is the reason behind the ‘smart’ portion of their name. Moreover, it is possible to encode complex and long-winded scenarios into the code of a smart contract. Developers are able to make provisions for any number of outcomes depending on their specific set of circumstances.
Another way to think of this is to view smart contracts as complex if-then instructions. The actions which the contract executes depend on each other. If the parties involved in the agreement honor the stipulations relevant to them, then the smart contract finalizes the matter according to its code. However, if either party does not stick to its clauses, then the smart contract will impose the punitive actions defined in its design.
Take, for instance, X is attempting to purchase items from online store Y. A smart contract can be utilized to mediate the business interaction. The agreement can be drafted in such a way that X submits the funds equal to the value of the goods he wants to buy into the wallet connected to the contract. These funds are then locked and are only released to shop Y once X receives his goods. If the shop fails to deliver the items for whatever reason then the smart contract will revert the funds back to X’s wallet.
This is an example of a simple smart contract in an e-commerce scenario. However, as referenced earlier smart contracts can support very complex scenarios depending on their design. In addition, smart contracts can be used to power decentralized applications (DApps). The proliferation of DApps on the Ethereum blockchain due to the smart contract feature is a major reason for the growth of the blockchain sector.
The Ethereum whitepaper explains how the smart contract feature is essential to creating whole blockchain-powered ecosystems through which it is possible to create and support a wide array of scenarios.
“What Ethereum intends to provide is a blockchain with a built-in fully fledged Turing-complete programming language that can be used to create “contracts” that can be used to encode arbitrary state transition functions, allowing users to create any of the systems described above, as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code,” the whitepaper states.
The number of DApps on the Ethereum blockchain continues to rise. There are currently over 5000 smart contracts on the platform, powering over 2000 DApps. Moreover, smart contracts have been the key driver of the initial coin offering (ICO) market, which has helped blockchain startups to raise billions of dollars in the past three years.
Smart Contract Projects
Due to the success of the Ethereum platform, a number of developers have launched new blockchain-powered smart contract computing platforms. Cayman-island based EOS is one such project. Founded by the well-known crypto personality Dan Larimer, the platform also provides the smart contract feature to its users. EOS claims to be much faster and scalable than the Ethereum blockchain.
In 2015 Charles Hoskinson, an Ethereum co-founder, created Cardano. Parting from his co-developers on Ethereum due to ideological differences, Hoskinson developed Cardano as an alternative to Ethereum. The project supports smart contracts and is similar to Ethereum in many ways. It is often referred to as a potential ‘Ethereum Killer’ due to the improvements the platform has to offer over its predecessor.
Chinese project NEO is another smart contract and DApp platform. Formerly known as Antshares, the project further expands on smart contract functionality to create what it calls a smart economy. This refers to the digitization of physical assets which can then be exchanged on-chain.
Stellar is a blockchain project that aims to ease the transfer of value across borders. However, its design also supports smart contracts. It is important to note that the smart contracts on Stellar are not Turing-complete, therefore, can only power simple transactions and are not suitable for complicated scenarios. However, an advantage of this design is an enhanced speed which the Stellar blockchain possesses.
Justin Sun-led Tron is another promising blockchain-based platform that supports smart contracts and DApps. Transactions on the Tron blockchain are fee-less and the network supports both simple and complex smart contracts.
While Ethereum pioneered the era of blockchain-based smart contracts, there are a number of projects which provide viable alternatives. What is undeniable is the impact that smart contracts have had on the crypto economy as well as the impact they could potentially have on the greater global economy.
