There isn’t a place in the blockchain world where there isn’t any talk of the blockchain technology itself and smart contacts.
Blockchain represents a certain form of a secure, distributed ledger of transactions. In a distributed ledger, there should be lots of copies of the secured information that are synchronized and distributed geographically, as to provide redundancy and transparency. The data inside the block is coded, but everyone can see that the block exists. The most famous use of the distributed ledger is the management of cryptocurrencies. But the technology is applied in a myriad of applications in which transparent and secure record keeping is crucial.
What A Smart Contract is
Smart contacts are an encrypted program stored on a blockchain, that automatically operate if the terms and conditions are met. The advantages of smart contacts are mostly visible in business collaborations, in which they are enforcing some type of correspondence, which ensures that all participants get the outcome they were looking for.
So, for an example, if you ever bought a car from a dealership, you know there are several steps to be taken. Like, if you can’t pay for the car right away, you’ll have to obtain financing. And if you are obtaining your financing, you’ll need to fill out a few forms, just so that the dealership can verify your identity. And during this process, you’ll have to go through a few people, such as the salesperson, finance broker, and lender. And for their services, there are several commissions and fees added to the price of the car.
So what the smart contacts do is making the process more efficient and smooth-running. The way this is possible is because, your identity is already on the blockchain, and lenders make a much quicker decision regarding the credit. This creates a smart contact between your bank, the dealer and the lender. The transfer of the ownership is automatic, and the transaction is recorded on a blockchain and is shared so that all the participants can check it anytime.
Smart contacts work when a network of computers enforce actions like registering a vehicle, issuing a ticket, etc… once the terms and conditions have been met. And once the transaction is completed, the blockchain gets updated.
But this is usually a process that involves both stakeholders and developers.
The benefits that smart contacts bring to the table are speed and accuracy, trust, security, and savings.
When it comes to speed and accuracy, the smart contacts are digitalized and automated, which means you won’t have to spend time like processing paperwork, and computers are more accurate than the legal personnel. Since, there are a lot of rules, terms, and conditions that have to be met, this brings a certain level of trust and security to smart contacts. And as for savings, well, smart contacts eliminate the need for intermediaries, since the users can trust the technology to execute the transaction accurately.
The Downsides And Risks Of Smart Contracts
Smart contact’s security depends on the code in which it is written and the infrastructure in which it runs and works.
For instance, in 2016, DAO, a smart contract-based investment fund, collected over $150 million in cryptocurrency in the 27 day period. Within this period, it was published that a number of security vulnerabilities in the infrastructure was identified. And a month later, hackers drained $50 million and exploited a lot of vulnerabilities, even the ones that were published. Because smart contracts are made for a binary system, but the world itself is not binary.
Another use for smart contacts was created by Slock.it, in Germany, consisting of smart contacts automating the rental of Airbnb accommodation. The way that it works is that when the payment is mad, the smart contact unlocks the door. So what if the accommodation is not as advertised?
See, the smart contacts’ foundation is in interfaces, business rules and data. Since the technology is evolving, the smart contacts need to evolve as well, just so they can sustain compatibility with the operating platforms in order to work correctly.
Smart contracts represent a revolution in automating a lot of everyday transactions, but they also create an open window for hackers to exploit what they have to offer.