Private vs Public Smart Contracts & The Evolution of Agreements

Are private smart contracts preferred to public ones, and what are some real-world use cases? What is a smart contract?

A smart contract is a precoded program or a transaction protocol, stored on a blockchain, intended to execute automatically as soon as the terms of a contract or an agreement are satisfied, so there is no need for a third-party intermediary. Touted as a way to increase the efficiency of transactions and reduce costs by eliminating the need for middlemen such as banks, lawyers, and real estate agents, smart contracts are a way to create tamper-proof records of transactions, contracts, and agreements.

And the biggest advantage in our opinion is that they can help to reduce counterparty risk. For example, if two parties are entering into a contract where one party is selling a product to the other, the smart contract can hold the funds in escrow until the product has been delivered. This reduces the risk of one party not fulfilling their obligations under the contract.

There are also some risks associated with their use, linked to the impossibility to stop or change the contract execution and vulnerability to hacking or other malicious activity. But there are ways to solve that, and we’ll write another post about how the Partisia Blockchain solves these.

In Blockchain, there are two types of smart contracts: public and private.

Public Smart Contracts

Public smart contracts are visible, which means auditable and verifiable by anyone who accesses the open source code on the blockchain. This means there is the potential of being highly trusted. They may also be more resistant to fraud since any attempted tampering would be immediately visible. This comes with the drawback of being less private since anyone can see the terms of the contract, which poses a major problem for use cases that require privacy, such as finance or health. Some of the most well-known public smart contracts are Ethereum’s ERC20 and ERC721 tokens, which have been used to launch thousands of Initial Coin Offerings (ICOs).

Private Smart Contracts

We’ve previously covered in detail the Private Smart Contracts in a Medium post here. In short and relevant to this comparison topic, they are smart contracts not visible to the public. This can help protect the parties involved from outside interference or malicious activity, but they cannot be easily audited or verified by third parties.

This permissioned access makes private smart contracts ideal for use cases that require privacy, such as financial transactions or health records. Private smart contracts also have the added benefit of being more resistant to tampering and hacking, since only authorized parties can view and execute the code.

Real-world use cases

Now that we’ve covered the basics of public and private smart contracts, let’s take a look at some real-world use cases for each.

Public Smart Contracts:

NFT’s are by far the most hyped use cases of smart contracts. Although most people have read, laughed, some invested (and then cried) in NFTs such as Bored Ape Yacht Club, the Partisia Blockchain has partnered with Bono’s (RED) organization to deliver NFTs for a good cause. Doubled by the Gates Foundation’s donation, this NFT drop made 160,000 COVID vaccines available to people in vulnerable countries with medicine supply problems.

Read all about it in Forbes: Partisia NFT Drop Fights Pandemics & Saves Lives

Decentralized Exchanges or DEX’s use smart contracts to facilitate the trading of cryptocurrencies and other assets without involving a third party intermediation. The 0x protocol, for example, is a decentralized exchange that uses Ethereum smart contracts to match orders between buyers and sellers. This allows users to trade directly with each other without the need for a centralized exchange.

Tokens can represent anything from a currency or asset to loyalty points or voting rights. Using smart contracts, tokens can be created, transferred, and managed in a transparent and secure way, and this works great when there’s no need for confidentiality.

Private Smart Contracts:

Voting is precisely the clearest case when private smart contracts are preferred to create a secure and tamper-proof voting system. The vote tokens could be stored on a blockchain and each voter would have a unique token that they could use to cast their vote. The smart contract would then tally the votes and determine the outcome of the election without exposing the identity of the voters.

Auction with concealed bidding requires a similar private smart contract set-up. In this type of auction, the bids are stored on the blockchain but are only accessible to the parties involved in the auction. This allows bidders to remain anonymous and prevents collusion between buyers.

Self-sovereign digital identity is yet another system where public smart contracts would deliver a suboptimal result. With private smart contracts, users would remain in complete control over their personal data and data would only be shared in confidential environments on a case-by-case basis. The data would be stored on the blockchain and only accessible to those with the proper permissions. Here at Partisia Blockchain, we have been partnering with institutional parties who desire to develop a decentralized electronic identity system that will be open source. We’ll share all about this in our future posts.

Feel free to let us know about even more revolutionary smart contract use cases in the comments below.