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A smart contract is a computer protocol that facilitates, verifies, or enforces the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible.
What is a smart contract?
The concept of a smart contract was first proposed by Nick Szabo in 1994. Szabo is a computer scientist, legal scholar, and cryptographer who is credited with developing the concept of digital currency.
Smart contracts were created to facilitate the execution of digital agreements between two or more parties without the need for a third-party intermediary. They allow for the automation of processes, reducing costs and increasing efficiency. They also provide a secure and transparent way to execute agreements, ensuring that all parties involved are aware of their obligations.
How do smart contracts work?
Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network.
It permits trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. They render transactions traceable, transparent, and irreversible.
They are used in a wide variety of applications, such as financial services, insurance, real estate, supply chain management, and healthcare. They can be used to automate processes, reduce costs, and increase efficiency. Smart contracts can also be used to create digital tokens that represent real-world assets, such as stocks, bonds, and other financial instruments.
Advantages of a smart contract
Smart contracts are created to facilitate, verify, and enforce the negotiation or performance of a contract. Here are some advantages of smart contracts explained in detail with examples:
1) Automation
These contracts are automated, which means they can execute themselves without any human intervention. For example, if a smart contract is set up to transfer a certain amount of money from one person to another on a specific date, it will automatically execute the transaction on the specified date without any manual intervention.
2)Trust
Smart contracts are based on blockchain technology, which means they are transparent and immutable. This makes them trustworthy and eliminates the need for intermediaries or third parties to verify the contract. For example, if a smart contract is set up to transfer a certain amount of money from one person to another in exchange for a product or service, the contract cannot be altered or tampered with, ensuring that both parties can trust the terms of the contract.
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3) Efficiency
They’re faster and more efficient than traditional contracts because they are automated and do not require manual processing. For example, if a smart contract is set up to transfer ownership of a property, it can be done in a matter of minutes rather than the days or weeks it would take to process a traditional contract.
4) Cost-Effective
Can save time and money by eliminating the need for intermediaries or third parties to verify and enforce the contract. For example, if a smart contract is set up to transfer ownership of a property, the cost of hiring a lawyer to draft and process a traditional contract can be eliminated.
5) Accuracy
They are more accurate than traditional contracts because they are based on predetermined rules and conditions that cannot be altered. For example, if a smart contract is set up to transfer ownership of a property, the terms of the contract cannot be changed or modified, ensuring that the transaction is accurate and fair for both parties.
Disadvantages of a smart contract
1) Complexity
Smart contracts can be complex to design and implement, especially for individuals or organizations without technical expertise. This can lead to errors or vulnerabilities in the contract that can compromise its effectiveness. For example, in 2017, a bug in a smart contract for an Ethereum-based decentralized autonomous organization (DAO) allowed hackers to steal millions of dollars worth of cryptocurrency.
2) Limited functionality
Smart contracts are limited by the capabilities of the blockchain platform on which they are built. This means that they cannot perform tasks outside of the capabilities of the platform, such as accessing external data or interacting with non-blockchain systems.
3) Immutability
Once a smart contract is deployed on the blockchain, it is extremely difficult to modify or change. This can be problematic if errors are discovered in the contract or if the contract needs to be updated to reflect changes in the underlying business or legal environment.
4) Lack of legal recognition
In many jurisdictions, smart contracts are not yet legally recognized as binding agreements. This means that parties to a smart contract may not have the same legal protections as they would in a traditional contract.
5) Security concerns
They are vulnerable to security breaches and hacks, just like any other computer system. If a hacker is able to gain access to a smart contract, they could potentially alter the terms or steal assets contained within the contract.
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6) Scalability issues
Smart contracts can be resource-intensive to execute, which can lead to scalability issues on the blockchain. This can result in slow transaction speeds and high fees for users.
7) Lack of flexibility
They are designed to execute automatically based on predetermined conditions. This lack of flexibility can be problematic if the parties to the contract need to make changes or exceptions to the terms of the contract
Smart contracts applications
1) Supply chain management
Smart contracts can be used to automate and streamline the supply chain process by automating the tracking and transfer of goods and services between different parties. For example, a smart contract could be used to automatically release payment to a supplier once a shipment of goods has been received and verified.
2) Real estate
Smart contracts can be used to automate the process of buying and selling real estate by automating the transfer of ownership and payment. For example, a smart contract could be used to automatically transfer ownership of a property to the buyer once the purchase price has been paid in full.
3) Financial services
Smart contracts can be used to automate financial transactions, such as loans, insurance, and derivatives. For example, a smart contract could be used to automatically trigger the release of a loan once the borrower has satisfied all of the terms and conditions of the loan agreement.
4) Healthcare
Smart contracts can be used to automate the exchange of healthcare-related data, such as medical records and claims processing. For example, a smart contract could be used to automatically process and pay out insurance claims once all of the necessary documentation has been provided.
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5) Identity verification
Smart contracts can be used to automate the verification and authentication of identity information. For example, a smart contract could be used to verify the identity of an individual before allowing them access to a particular service or resource.
6) Voting
Smart contracts can be used to automate the voting process in elections or other decision-making processes. For example, a smart contract could be used to automatically count and tally votes and announce the winner once the voting period has ended.
List of smart contract languages 👩🏻💻
1) Solidity
Solidity is a high-level, contract-oriented programming language for writing a smart contract. It is designed to be used for creating decentralized applications (dApps) and is the most popular language to write Ethereum smart contracts.
2) Vyper
Vyper is a Python-like language for writing contracts on the Ethereum blockchain. It is designed to be more secure and easier to read and audit than Solidity.
3) Rust
Rust programming language is gaining popularity for use in smart contracts due to its focus on safety and security. It is designed to be fast and efficient, and it includes features such as memory safety and data-race prevention.
4) Simplicity
Simplicity is a functional programming language for writing contracts on Ethereum. Pretty much like Rust, it is designed to be more secure and easier to audit than Solidity.
5) Move
Move is a domain-specific language for writing smart contracts on the Libra blockchain. It is designed to be easy to use and secure, and is optimized for writing distributed applications (dApps).
6) Go
Go is a programming language developed by Google that is gaining popularity for use in smart contracts due to its simplicity and efficiency. It is a compiled language that supports features such as concurrency and garbage collection.
How to write a smart contract
Here’s a step-by-step guide on how to create a smart contract, including code to help you understand the process.
Step 1: Choose a blockchain platform
Before you start creating a smart contract, you’ll need to choose a blockchain platform to use. There are several different platforms available, including Ethereum, Hyperledger Fabric, and EOS. Each platform has its own set of features and limitations, so you’ll need to choose the one that best fits your needs.
For example, if you choose the Ethereum platform, you’ll be able to use the Solidity programming language to write your smart contract. Here’s an example of how to specify the Solidity version and define a simple contract using the Ethereum platform:
pragma solidity ^0.6.0;
contract SimpleContract {
// Define variables
uint public balance;
// Define constructor function
constructor() public {
balance = 0;
}
// Define function to add to balance
function addToBalance(uint _amount) public {
balance += _amount;
}
}
Step 2: Learn a programming language
To create a smart contract, you’ll need to know how to write code. The most common language for writing smart contracts is Solidity, which is used on the Ethereum platform.
However, other languages like Go and Rust are also used on other platforms. If you’re new to programming, you may want to start by learning the basics of a programming language like Python or JavaScript before moving on to Solidity or another language specifically for smart contracts.
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Step 3: Define the terms of the contract
Before you start writing code, you’ll need to clearly define the terms of the contract. This includes specifying the parties involved, the goods or services being exchanged, and any conditions or clauses that need to be met. It’s important to be as specific as possible to ensure that the contract can be accurately enforced by the code.
For example, if you are writing a simple contract to buy and sell a product, you might define the following variables and functions:
// SPDX-License-Identifier: UNLICENSED
pragma solidity ^0.6.0;
contract ProductContract {
// Define variables
uint public price;
uint public quantity;
address payable public seller;
address payable public buyer;
bool public contractClosed;
// Define constructor function
constructor(uint _price, uint _quantity, address payable _seller) public {
price = _price;
quantity = _quantity;
seller = _seller;
contractClosed = false;
}
// Define function to buy product
function buyProduct(uint _quantity) public payable {
require(!contractClosed, "Contract is closed");
require(_quantity <= quantity, "Not enough product available");
require(msg.value == _quantity * price, "Incorrect payment amount");
buyer = payable(msg.sender);
quantity -= _quantity;
seller.transfer(msg.value);
if (quantity == 0)
contractClosed = true;
}
// Define function to cancel contract
function cancelContract() public {
require(!contractClosed, "Contract is already closed");
require(msg.sender == seller || msg.sender == buyer, "Only seller or buyer can cancel contract");
contractClosed = true;
}
}Step 4: Write the code
Now it’s time to start writing code to create a smart contract. You’ll need to use the programming language you chose in step 2 to define the terms of the contract and specify the actions that should be taken when certain conditions are met. You may want to use code snippets or examples from other smart contracts as a reference.
For example, in the ProductContract example above, the `buyProduct` function includes several `require` statements to ensure that certain conditions are met before the transaction can be completed. The `require` statements check that the contract is not closed, that there is enough product available to buy, and that the correct payment amount has been received. If any of these conditions are not met, the transaction will be rejected and an error message will be displayed.
Step 5: Test the contract
Before deploying the contract, it’s important to thoroughly test it to ensure that it works as intended. This may involve running simulations or setting up a test environment to see how the contract behaves under different conditions. For example, you might create a test script that sends transactions to the contract with different input values to see how it responds.
You can use tools like Ganache to help you test your contract.
Step 6: Deploy the contract
Once you’ve tested the contract and are confident that it works as intended, you can deploy it to the blockchain. This will make it live and enforceable on the network.
To deploy the contract, you’ll need to use a tool like Truffle or Remix to compile and deploy the code to the blockchain. You’ll need to have a wallet or account on the blockchain platform you are using, and you may need to pay a small fee to deploy the contract.
Overall, writing contracts can be a complex process, but with a little programming knowledge and some careful planning, you can create a smart contract that is secure, transparent, and enforceable.