SMART CONTRACTS - moving towards decentralization
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I’ve been a little more consistent with writing articles on Medium. I may not be able to pin it to a single reason; it’s a lot of things from wanting to be a more creative person, a better writer, and — most importantly — a better DeFi writer. Everything along those lines.
The potential of DeFi intrigues me, and I intend to create as much content as possible about it.
In my experience, people often ignore discussions of blockchain, cryptocurrencies, DeFi, and related ideas because they find these discussions overwhelming and are unable to understand them.
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Cryptocurrency and blockchain technology aren’t made for a few people; they’re concepts everyone should have access to and comprehend. To encourage more people to embrace blockchain technology, I plan to write in simple words and use analogies.
SMART CONTRACTS
Consider an automated teller machine(ATM), for example. ATMs are designed to dispense cash, and the most advanced models can also handle cash deposits. However, a few boxes must be checked before an ATM can successfully dispense cash; it is not designed to hand money to everyone who approaches it. These requirements include having a regular bank account that is legally permitted to function, having a certain amount in the bank accounts of those willing to withdraw cash, having a debit card required to use an ATM, and so on. If a person complies with these standards, their withdrawal will be approved. They are unable to withdraw if they don’t. This is exactly how a smart contract on blockchain technology functions in this case.
A smart contract binds the activities between parties on the blockchain. It is created using the “If-then, else” operability. Simply put, “if the transaction is correct, then carry out the operation; else, cancel it.” According to Livio’s English Dictionary, a contract is “an agreement between two or more parties, to undertake a certain job or work order, sometimes temporary or of limited duration and usually governed by a written agreement.” If the contract’s terms are not fulfilled, there has been a breach of the contract, which typically carries a penalty.
With a smart contract, the inability to comply with the conditions results in a failed transaction on the blockchain.
A smart contract on the blockchain includes a set of codes that give instructions for what is expected. Similar to how words summarize and explain what is included in a conventional contract.
A blockchain network must allow the creation of smart contracts to create a smart contract on that blockchain network. The Ethereum chain is the one with the most smart contracts. Though other blockchain networks can be used to create smart contracts, some of them can; the Ethereum chain is the best and most adaptable. Although Bitcoin supports smart contracts, it cannot handle as much as Ethereum.
A programming language known as solidity is used to create the codes that make up a smart contract on the Ethereum network. Smart contracts are more likely to be authentic than traditional contracts because they are bound by codes and stored on the blockchain.
WHY SMART CONTRACTS?
1) Smart contracts have an immutable nature, and it wouldn’t be possible to change the details of a smart contract after it must have been deployed.
2) Smart contracts are transparent since they’re built on the blockchain. Things created using blockchain technology typically acquire blockchain properties by default. For this reason, details of a smart contract are always available to the public, making it simple to determine if it could be altered or even written poorly.
3) Smart contracts eliminate centralization. Typically, the conventional contract will require a central body that can verify the details of a contract between the parties involved, but with smart contracts, no third party is needed. All parties interact with the contract, and if they fulfill its requirements, everyone experiences a successful transaction; otherwise, the transaction fails.
USES OF SMART CONTRACTS
1. CROWDFUNDING: Crowdfunding is one of the most prominent applications for smart contracts. Conventionally, finding a platform that enables community funding is required to seek funding to support a project or an idea. This platform then disburses funds to the project after the funding target has been met and collects a processing fee; if financing requirements are not satisfied, funds are returned to the contributors.
Sponsoring a project is quite simple when utilizing a smart contract. There’s no need for a third-party platform to make contributions possible. The specifications of the project, target funds, and a wallet address to accept all funds can all be stated in a smart contract. Contributors can then fund the smart contract address with cryptocurrencies accepted as the contract states. The fund is automatically sent to the indicated address when the conditions are met. If the goals are not achieved, contributions are immediately and impartially refunded to the contributors.
In a smart contract, funds deposited into the address are transparent, and everyone can keep track of it. Additionally, unless all conditions are satisfied, removing these funds from the address is difficult due to the blockchain’s immutability; the smart contract keeps the money locked up. This is similar to cryptocurrency launchpads, where users can find and fund new cryptocurrency projects. Only there necessarily won’t be a launchpad(centralized system) that manages the fund.
2. DEFI: what is the discussion around smart contracts without the mention of DeFi? “Incomplete” would be an acceptable answer. Numerous DeFi activities, such as lending and borrowing as well as token swapping and exchange, have been made feasible through smart contracts. Smart contracts are used to write the codes that confirm or reject transactions on DeFi platforms. It’s what makes it possible to swap the equivalent of ETH in USDC; the contract is written in a way that allows it to take note of market prices and complete exchanges in the equivalent of what the market displays. It also ensures that lending is adequately collateralized before completing the transaction. Most DeFi operations you can think of are executed using smart contracts.
3. SUPPLY CHAIN: Businesses can use smart contracts to streamline their supply chains. As a result, a smart contract, for instance, will be able to recognize when a store runs out of a specific product and will promptly place an order with a supplier. It may be written so it can fill the order before the product runs out at the store. It will require a connection to an oracle that can provide off-chain/real-world data. The blockchain doesn’t naturally display information about the number of products a corporation has in stock, but oracle makes it feasible.
4. INSURANCE: Smart contracts are also applicable to the insurance industry. Rather than requiring a lawyer to draft an agreement or the insurance company to physically verify the state of things, the insurance company can deploy smart contracts to cover all of these activities. The contract will contain the agreement’s specifics and the criteria between the parties.
A smart contract can automatically compensate a person who insured his farm against flood caused by excessive rainfall without the insurance provider verifying the situation. Smart contracts will need to interact with an oracle, like in the supply chain case, to confirm whether there was significant rainfall capable of causing flood in the area where that farmland is located. Once the oracle can ensure the situation, all relevant procedures are carried out.
In some sectors, like the insurance industry, a lawyer might still be necessary, but that could have been a one-time need. To ensure that the smart contract has the relevant information, developers would probably need a lawyer’s contribution when writing the codes.
FUTURE OUTLOOK
In the future, we expect that smart contracts can do more as decentralization continues to be embraced.
While smart contracts will still be built on the blockchain to maintain its immutability, transparency, and decentralization, it won’t always be about cryptocurrency. In more robust use cases, smart contracts can apply to real-life events.
Say, in the event of owning a property, the details of the property’s deed can remain on a smart contract. In the event of a purchase or sale, ownership can be readily transferred utilizing smart contracts to identify and record the property’s new owner. This is closely related to NFTs, where possession of a digital asset can represent ownership of a physical object. Through blockchain technology, smart contracts can document the transfer of this asset to new owners. In a dispute where the genuine property owner needs to be confirmed, provided that a smart contract has been created for the transfer of the property, the smart contract can quickly determine who is legally entitled to ownership.
Different industries that require maintaining ledgers and storing data files in their database can use smart contracts. Smart contracts enable the collection and storage of client and customer data in an encrypted way. Like in the healthcare industry, people will naturally not want their health information to be made public.
Whether smart contracts can entirely confirm real-life events is still debatable. Smart contracts’ oracle, which provides real-life data, has a limited capacity because it depends on quantifiable factors. Questions like how does an oracle measure a car accident, for example? Or a fire breakout? doesn’t relying on an oracle negate the idea of decentralization and create a single point of failure? are questions that beg for answers.
Blockchain technology is still in its infancy, and so is anything developed on it, but the good news is that there’s plenty of room for improvement. More people and even large corporations are entering the blockchain industry and utilizing its technologies on a daily basis.
Blockchain isn’t and never will be just about cryptocurrency — be on the lookout!
