Cryptoland Episode 5: Bringing Trust into the world of Crypto.
Welcome back to another episode of Cryptoland. It has been a long time since we caught up. I have been out with a sports injury and am finally on the road to recovery and can get back to writing. The past week has been turbulent for the financial world, with the SVB and Signature Bank run causing panic and disarray. Fortunately, the Federal Bank swooped in to ensure consumers’ money was safe. With global markets slowly calming down, Credit Suisse had some fantastic news as they opened a can of worms. UBS has swooped in to purchase its biggest competitor in Switzerland to save the world from an economic collapse.
The above events give me further validation to keep writing about Cryptoland so that I can educate you guys on the alternate financial world out there so that you can weigh out your options. Today we will dig into the concept of smart contracts — a timely article since it is critical to ensuring stability within the blockchain.
In 1994, Nick Szabo devised this concept when he invented the world’s first virtual currency “BitGold.” As a side note, Nick is rumored to be the real Satoshi Nakamoto but has denied it. Szabo started this exercise to extend digital transactions, such as POS, to the digital realm. Today, various blockchains use smart contracts to automate actions specific between two parties. They do not contain legal language but are only executed when conditions are met between two parties, thereby policing the system.
Uses of Smart Contracts
In cryptocurrency, smart contracts verify whether a transaction has occurred between two peers. Once confirmed on the blockchain, both peers receive a message confirming a transaction. In the banking system, the peer must verify their account to do the same. Smart contracts have also expanded to other industries, such as real estate, stock & commodity trading, lending, supply chain, healthcare and governance.
For example in healthcare smart contract technology can keep the data secured through encryption of the entire database of health records. The technology also comes with a private key without which no individuals can gain access to the database.
Advantages of Smart Contracts
Efficiency: Since the entire contract is a script, the check is almost instant and requires no further addition. As we advance in the sector of AI, smart contracts can be trained by models to find weaknesses. Just a few days ago, GPT-4 looked at the Ethereum smart contract and found areas of improvement to strengthen its ecosystem further.
Accuracy: As no human is involved, the chances of error are close to nil, making every result foolproof. In these industries, they can add to substantial cost savings.
Immutability: Once done, the programming cannot be altered, thereby limiting fraud and providing more security to the end-user as a benefit.
Disadvantages of Smart Contracts
Permanent: Once executed, there is no coming back, so if there is a mistake in the design of the smart contract, liability needs to be taken care of.
Human Factor: The smart contract is as good as the person designing it. If there is miscommunication in understanding the requirements between the developer and the product team, it may cause an erroneous contract. These can be resolved with the help of artificial intelligence conducting quality checks on the agreement to highlight any areas of improvement.
Loopholes: There may be loopholes in the coding, allowing for contracts to be executed in bad faith. Since humans are at the tail end of creating these contracts, there might be opportunities for gaps in the contract. The community should collaborate to build a set of rules that act as a baseline for designing a contract. The base can be amended to accommodate a healthy trust-based ecosystem as we keep building and learning.
Ethereum has smart contract capabilities inherent to its blockchain. After the Taproot upgrade, the Bitcoin blockchain received smart contract capabilities, allowing it to communicate to layers with smart contracts enabled on their blockchains.
In simple terms, smart contracts are apps on a blockchain that make each side of a transaction complete its part. For example, a smart contract could initiate a fund transfer with a third party to verify that the transfer took place.
Smart contracts are outstanding as a baseline to ensure transaction protection due to their ability to authenticate instantly. However, with recent advancements, there is room to grow, wherein the community needs to work on the next-generation smart contract that can learn from mistakes and correct itself to build a foolproof system. In this manner, the users can place their trust in the blockchain rather than the peer on the other end of the transaction.
