Smart Contracts in Blockchain

A Smart Contract (or cryptocontract) is a computer program that directly and

automatically controls the transfer of digital assets between the parties under
certain conditions. A smart contract works in the same way as a traditional
contract while also automatically enforcing the contract. Smart contracts are
programs that execute exactly as they are set up (coded, programmed) by
their creators. Just like a traditional contract is enforceable by law, smart
contracts are enforceable by code.
 The bitcoin network was the first to use some sort of smart contract by
using them to transfer value from one person to another.
 The smart contract involved employs basic conditions like checking if the
amount of value to transfer is actually available in the sender account.
 Later, the Ethereum platform emerged which was considered more
powerful, precisely because the developers/programmers could make
custom contracts in a Turing-complete language.
 It is to be noted that the contracts written in the case of the bitcoin
network were written in a Turing-incomplete language, restricting the
potential of smart contracts implementation in the bitcoin network.
 There are some common smart contract platforms like Ethereum, Solana,
Polkadot, Hyperledger fabric, etc.

History:

In 1994, Nick Szabo, a legal scholar, and a cryptographer recognized the

application of a decentralized ledger for smart contracts. He theorized that
these contracts could be written in code which can be stored and replicated
on the system and supervised by the network of computers that constitute
the blockchain. These smart contracts could also help in transferring digital
assets between the parties under certain conditions.

Features of Smart Contracts

The following are some essential characteristics of a smart contract:

1. Distributed: Everyone on the network is guaranteed to have a copy of all
the conditions of the smart contract and they cannot be changed by one
of the parties. A smart contract is replicated and distributed by all the
nodes connected to the network.
2. Deterministic: Smart contracts can only perform functions for which they
are designed only when the required conditions are met. The final
outcome will not vary, no matter who executes the smart contract.
3. Immutable: Once deployed smart contract cannot be changed, it can only
be removed as long as the functionality is implemented previously.
4. Autonomy: There is no third party involved. The contract is made by you
and shared between the parties. No intermediaries are involved which
minimizes bullying and grants full authority to the dealing parties. Also,
the smart contract is maintained and executed by all the nodes on the
network, thus removing all the controlling power from any one party’s
hand.
5. Customizable: Smart contracts have the ability for modification or we can
say customization before being launched to do what the user wants it to
do.
6. Transparent: Smart contracts are always stored on a public distributed
ledger called blockchain due to which the code is visible to everyone,
whether or not they are participants in the smart contract.
7. Trustless: These are not required by third parties to verify the integrity of
the process or to check whether the required conditions are met.
8. Self-verifying: These are self-verifying due to automated possibilities.
9. Self-enforcing: These are self-enforcing when the conditions and rules
are met at all stages.

Capabilities of Smart Contracts

1. Accuracy: Smart contracts are accurate to the limit a programmer has

accurately coded them for execution.
2. Automation: Smart contracts can automate the tasks/ processes that are
done manually.
3. Speed: Smart contracts use software code to automate tasks, thereby
reducing the time it takes to maneuver through all the human interaction-
related processes. Because everything is coded, the time taken to do all
the work is the time taken for the code in the smart contract to execute.
4. Backup: Every node in the blockchain maintains the shared ledger,
providing probably the best backup facility.
5. Security: Cryptography can make sure that the assets are safe and
sound. Even if someone breaks the encryption, the hacker will have to
modify all the blocks that come after the block which has been modified.
Please note that this is a highly difficult and computation-intensive task
and is practically impossible for a small or medium-sized organization to
do.
6. Savings: Smart contracts save money as they eliminate the presence of
intermediaries in the process. Also, the money spent on the paperwork is
minimal to zero.
7. Manages information: Smart contract manages users’ agreement, and
stores information about an application like domain registration,
membership records, etc.
8. Multi-signature accounts: Smart contracts support multi-signature
accounts to distribute funds as soon as all the parties involved confirm the
agreement.
9.
How Do Smart Contracts Work?

A smart contract is just a digital contract with the security coding of the
blockchain.
 It has details and permissions written in code that require an exact
sequence of events to take place to trigger the agreement of the terms
mentioned in the smart contract.
 It can also include the time constraints that can introduce deadlines in the
contract.
 Every smart contract has its address in the blockchain. The contract can
be interacted with by using its address presuming the contract has been
broadcasted on the network.
The idea behind smart contracts is pretty simple. They are executed on a
basis of simple logic, IF-THEN for example:
 IF you send object A, THEN the sum (of money, in cryptocurrency) will be
transferred to you.
 IF you transfer a certain amount of digital assets (cryptocurrency, for
example, ether, bitcoin), THEN the A object will be transferred to you.
 IF I finish the work, THEN the digital assets mentioned in the contract will
be transferred to me.
Note: The WHEN constraint can be added to include the time factor in the
smart contracts. It can be seen that these smart contracts help set conditions
that have to be fulfilled for the terms of the contract agreement to be
executed. There is no limit on how much IF or THEN you can include in your
intelligent contract.
Smart Contract Working
 Identify Agreement: Multiple parties identify the cooperative opportunity
and desired outcomes and agreements could include business processes,
asset swaps, etc.
 Set conditions: Smart contracts could be initiated by parties themselves
or when certain conditions are met like financial market indices, events
like GPS locations, etc.
 Code business logic: A computer program is written that will be
executed automatically when the conditional parameters are met.
 Encryption and blockchain technology: Encryption provides secure
authentication and transfer of messages between parties relating to smart
contracts.
 Execution and processing: In blockchain iteration, whenever consensus
is reached between the parties regarding authentication and verification
then the code is executed and the outcomes are memorialized for
compliance and verification.
 Network updates: After smart contracts are executed, all the nodes on
the network update their ledger to reflect the new state. Once the record
is posted and verified on the blockchain network, it cannot be modified, it
is in append mode only.

Applications of Smart Contracts

1. Real Estate: Reduce money paid to the middleman and distribute

between the parties actually involved. For example, a smart contract to
 transfer ownership of an apartment once a certain amount of resources
have been transferred to the seller’s account(or wallet).
2. Vehicle ownership: A smart contract can be deployed in a blockchain
that keeps track of vehicle maintenance and ownership. The smart
contract can, for example, enforce vehicle maintenance service every six
months; failure of which will lead to suspension of driving license.
3. Music Industry: The music industry could record the ownership of music
in a blockchain. A smart contract can be embedded in the blockchain and
royalties can be credited to the owner’s account when the song is used
for commercial purposes. It can also work in resolving ownership
disputes.
4. Government elections: Once the votes are logged in the blockchain, it
would be very hard to decrypt the voter address and modify the vote
leading to more confidence against the ill practices.
5. Management: The blockchain application in management can streamline
and automate many decisions that are taken late or deferred. Every
decision is transparent and available to any party who has the
authority(an application on the private blockchain). For example, a smart
contract can be deployed to trigger the supply of raw materials when 10
tonnes of plastic bags are produced.
6. Healthcare: Automating healthcare payment processes using smart
contracts can prevent fraud. Every treatment is registered on the ledger
and in the end, the smart contract can calculate the sum of all the
transactions. The patient can’t be discharged from the hospital until the
bill has been paid and can be coded in the smart contract.
Example Use cases:
1. Smart contracts provide utility to other contracts. For example, consider a
smart contract that transfers funds to party A after 10 days. After 10 days,
the above-mentioned smart contract will execute another smart contract
which checks if the required funds are available at the source
account(let’s say party B).
2. They facilitate the implementation of ‘multi-signature’ accounts, in which
the assets are transferred only when a certain percentage of people
agree to do so
3. Smart contracts can map legal obligations into an automated process.
4. If smart contracts are implemented correctly, can provide a greater
degree of contractual security.

Advantages of Smart Contracts

1. Recordkeeping: All contract transactions are stored in chronological

order in the blockchain and can be accessed along with the complete
audit trail. However, the parties involved can be secured cryptographically
for full privacy.
2. Autonomy: There are direct dealings between parties. Smart contracts
remove the need for intermediaries and allow for transparent, direct
relationships with customers.
3. Reduce fraud: Fraudulent activity detection and reduction. Smart
contracts are stored in the blockchain. Forcefully modifying the blockchain
is very difficult as it’s computation-intensive. Also, a violation of the smart
contract can be detected by the nodes in the network and such a violation
attempt is marked invalid and not stored in the blockchain.
4. Fault-tolerance: Since no single person or entity is in control of the
digital assets, one-party domination and situation of one part backing out
do not happen as the platform is decentralized and so even if one node
detaches itself from the network, the contract remains intact.
5. Enhanced trust: Business agreements are automatically executed and
enforced. Plus, these agreements are immutable and therefore
unbreakable and undeniable.
6. Cost-efficiency: The application of smart contracts eliminates the need
for intermediaries(brokers, lawyers, notaries, witnesses, etc.) leading to
reduced costs. Also eliminates paperwork leading to paper saving and
money-saving.

Challenges of Smart Contracts

1. No regulations: A lack of international regulations focusing on blockchain

technology(and related technology like smart contracts, mining, and use
cases like cryptocurrency) makes these technologies difficult to oversee.
2. Difficult to implement: Smart contracts are also complicated to
implement because it’s still a relatively new concept and research is still
going on to understand the smart contract and its implications fully.
3. Immutable: They are practically immutable. Whenever there is a change
that has to be incorporated into the contract, a new contract has to be
made and implemented in the blockchain.
4. Alignment: Smart contracts can speed the execution of the process that
span multiple parties irrespective of the fact whether the smart contracts
are in alignment with all the parties’ intention and understanding.