What is Smart Contract and What Problem Does it Solve — Explained

Nena Vuckovic
theblockbox
Published in
6 min readOct 6, 2019

The year of ’94 has been considered as the period when many technological breakthroughs have been either introduced or suggested, but it was also a year when an American computer scientist Nick Szabo, often referred to as the famous Satoshi Nakamoto, introduced the idea of smart contracts for the first time.

Generally, contracts are defined as agreement documents whose terms and conditions concisely explain how the given act (ex. a transaction) will be processed, and it outlines the responsibilities of each member involved in it.

If you replace the same terms and conditions in a conventional contract paper by lines of codes that self-execute when certain conditions are met by the parties involved in a transaction, you’ll have a smart contract.

Smart contracts are contracts embedded in a blockchain, which makes the whole process entirely or partially decentralized. Upon the deployment of the smart contracts, it’s practically impossible to alter its code.

Definition of Smart Contracts

To put it simply, smart contracts are digital contracts that automatically process transactions when each of the encoded terms of the agreement is met by the transacting parties.

Why Do We Need Smart Contracts?

We got the basics. However, to fully grasp what smart contracts stand for, we must first understand why we need them in the first place.

Let’s say that you are purchasing a property for which you need a loan in advance from your bank. Capital consents and deposit is a multi-step procedure that contains many parties and lots of regulatory paperwork. Filling in your personal data, procuring the information from all the participants involved in the transaction, getting physical signatures, and so forth, are just some of the necessary requirements. This, on one hand, is very time-consuming and can be a very tiresome process, while on the other hand, it will probably add up the total cost substantially. All of the fuss just because there’s a lack of trust among the transaction participants.

Fast forward to the future when smart contracts are mainstream, and you are planning again to buy a property by taking a loan from a bank. You will be able to verify your identity using your digital identity stored on the blockchain. From the loan approval to the transfer of ownership, every successful transaction will be transacted in a matter of minutes and recorded on the blockchain.

This is how smart contracts eliminate the need for trust and make transactions faster and more secure.

Smart Contracts Benefits

In light of the above example, the use of smart contracts make transactions:

  1. Direct (no need of intermediaries)
  2. Cost-efficient
  3. Time-efficient
  4. More secure
  5. Extra fraud-resistant

What are Smart Contracts Use Cases?

Having in mind the upper-mentioned benefits, there are a plethora of industries that can integrate smart contracts within their internal processes and optimize the working methods.

  1. The banking industry can reap the benefits of significant time and cost savings in processing loans and other transactions.
  2. Medical and healthcare industry can use them to access patient identity and cross-institutional data, therefore providing better medical services.
  3. Smart contracts can use smart contracts to streamline supply chain processes and negate the inclusion of counterfeit products.
  4. Real estate markets can use smart contracts to process a large number of property transactions and to reduce intermediaries, resulting in denoting cost and time savings.
  5. The energy industry can make the trading of energy commodities easier and more economical through the use of blockchain and smart contracts.
  6. The gaming industry can use smart contracts to maintain transparency between game developers and gamers, and also provide instant payments to developers when their games or in-game products are bought.
  7. The insurance industry can use smart contracts to reinitiate the trust between insurers and customers by making sure that companies pay out the eligible sum to customers and the customers do not make false claims to receive illicit payouts.

Apart from these, there are numerous other places where the use of smart contracts can make the system more efficient and trustworthy.

Ethereum Smart Contract

Blockchain is often regarded as a synonym for Bitcoin — it’s most renowned and widespread use case. However, it was Ethereum, which is statistically 2nd biggest crypto asset and blockchain platform, that brought along the groundbreaking innovations within the industry. Prodigious, 18 years old developer dubbed as Vitalik Buterin created smart contracts that empowered the design, development and scaling of thousands of multifaceted applications. Its Virtual Machine (EVM) Turing complete software enables simultaneous execution of operations by every node in the Ethereum network, resulting in faster and easier blockchain creation.

So how does typical Ethereum smart contract work?

Ethereum smart contracts are empowered and verified by entities called miners (GPU heavy servers), that use consensus protocol called Proof of Work (PoW). Each transaction or operation on the Ethereum network has a cost, expressed in Gas, a measure of the computational use of the unit. Gas price and limit are correlated to the costs of launch a decentralized application (dApps) or development of the decentralized autonomous organization (DAO). Ethereum miners add a transaction (eg: cryptocurrency payment, smart contract operation…) to a new block on Ethereum network., which as explained is a cost of executing smart contract operations. When a smart contract is published or smart contract function executed, money verified and transferred to another account, miners get paid with Gas.

To learn more about Ethereum Smart Contracts, check this compelling video:

Ethereum Smart Contract Audit

Smart Contract Audit is the same as a conventional, standard code audit. It uncovers security vulnerabilities before the code is deployed to a production environment. The smart contract audit process includes automatic and manual penetration testing. Automatic audit targets commonly encountered security vulnerabilities, while manual audit tests for business logic vulnerabilities.

TheBlockBox smart contract audit process consists of manual code audit and security audits performed by automated tools. In this process, TheBlockBox team analyzes smart contract’s functionalities and performs necessary checks against known vulnerabilities. The focus of the audit is to inspect a smart contract to trace and negate any potential for fund losses.

Smart contract audit report with clearly defined audit metrics provides an estimate of the overall severity of vulnerabilities. The report also exhibits categorized vulnerabilities, using risk rating structure based on impact and likelihood scores. Audit reports are typically requested by smart contract developers, product owners of decentralized apps, or CIO/CEOs.

Hyperledger Smart Contracts

Ethereum (a public, permissionless blockchain) and Quorum (private, permissioned blockchain based on Ethereum code) are based on execute-order architecture. Some of the limitations that this introduces are sequential execution of all transaction which directly affects transaction throughput. The main concept that differentiates Hyperledger Smart Contracts from other blockchains is its execute-order-validate architecture.

Hyperledger Smart Contracts domain is referred to as the chaincode. Chaincode is a program that implements application logic and can be written in general-purpose programming languages such as GoLang, Java, NodeJS. This allows easier and wider adoption by software developers in contrast to domain-specific programming languages.

At this point, Hyperledger is one of the most mature and stable platforms for smart contracts development, as it offers great performance with high transaction throughput, privacy and modular consensus protocols.

Does Your Business Model Require Smart Contract?

Smart contracts, as you saw, have enormous potential to disrupt many major industries and businesses. If you’re wondering how you could use smart contracts to foster your business growth, or if you already have an idea waiting for implementation, we would love to hear your out.

At TheBlockBox, we’re a team of blockchain and smart contract development experts who help enterprises and startups design blockchain-based products, and develop and implement effective smart contracts solutions.

Drop us a line, and we’ll make sure you get the best out of blockchain and smart contracts.

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