Smart Contracts

In 2009, the inventor(s) of the popular bitcoin cryptocurrency showed that without having to go through banks, online payment systems, or other centralized authorities, there was a way to exchange money online.

Bitcoin has popularized the underlying technology, the blockchain. Without the need for intermediaries, Blockchain is a distributed ledger that allows parties to register and pass ownership of any digital asset.

Developers soon decided to build all kinds of blockchain applications beyond cryptocurrencies and the basic transfer of monetary value.

The second-largest blockchain and cryptocurrency, Ethereum, was published in 2015. "One of the major differences between Ethereum and Bitcoin was that it allowed developers on their decentralized network to publish and run smart contracts, earning the name "World Computer.

Smart contracts, without the need for a server, are bits of code that run on the blockchain. They are called "smart" because they work autonomously, and "contracts" because they are specifically intended to fulfill complex types of multi-party asset transfer.

The functionality of blockchain transactions are taken over by smart contracts, which ensures that they are open, permanent and auditable. No one entity may use them to their own advantage and alter them, and everyone has equal access to them.

Smart contract technology has paved the way for many different kinds of decentralized applications, even in its infancy. It's not without faults and boundaries, but it's definitely promising.

How are Smart Contracts operating?

To blockchain transactions, smart contracts add layers of knowledge and logic. To set conditions for transactions, developers can use smart contracts. The transaction automatically executes and, depending on the logic of the smart contract, distributes tokens or digital assets between the various parties involved when these conditions are met.

In the Solidity programming language, developers write smart contracts, compile them, and publish them on the Ethereum network. Other programming languages exist, but Solidity is the most common one by far.

Published smart contracts provide an address for the public. By sending ETH to their address, users may cause them, just as they would if they were to send funds, along with some extra info, to someone else. Smart contracts are executed by the same computers which help the Ethereum network and verify transactions. Since the Ethereum network is decentralized, it guarantees the equal and clear execution of smart contracts. No single node may modify a contract's terms and outcomes because it would contradict other network computers.

Smart contracts and decentralized apps

Although smart contracts can run independently, just like procedures and functions of any conventional program, they can also call each other. For example, when it is completed or in the course of its implementation, a smart contract can trigger another smart contract.

Developers may build decentralized applications (DApps), full programs that run on the blockchain, through creating interconnected smart contracts. In addition, more complex smart contract arrays and DApps will generate decentralized autonomous organizations (DAOs). DAOs are organizational systems that, based on their contribution to the network, function without the need for human managers and pay all participants.

The benefits of smart contracts

First, by automating the process through undeniable mathematical evidence, smart contracts obviate the need for attorneys, notaries and other brokers.

Second, transparent and immutable registration is supported by smart contracts. All a smart contract does is stored on the blockchain, unchanged and open to all, unlike centralized systems where contracts are held in walled gardens and secured by companies that charge their customers for the services they provide.

The direct effect of these two features is that, first, you save a lot of money but minimize broker costs, and second, instead of being held in a position where they can be manipulated or lost, your documents and contracts are backed up several times over.

The security risks of smart contracts

Smart contracts do come with some significant security threats and considerations, considering all their essential advantages. A security vulnerability in the DAO's smart contracts in 2016, which was to be the first use of decentralized autonomous organizations, allowed hackers to steal 3.6 million ETH at the time, 15 percent of all ether in circulation.

Last 2018, in the smart contracts of the Parity multi-sig wallet, hackers exploited vulnerabilities to steal 150,00 ETH, and a few months later, another defect in the same wallet froze around 514,000 ETH in user accounts. These are just some of the many cases of security linked to smart contracts that have resulted in digital currency theft.

Tampering and many other forms of cyber-attacks are resilient to Blockchain itself. Sadly, many are extending this definition to smart contracts, which is not valid. Smart contracts are vulnerable to coding mistakes and bugs, just like all programming source code. Smart contracts, however, have two distinct features that make them more sensitive than other applications for computers.

First, smart contracts involve money, meaning that they would be far more involved in poking at them to find vulnerabilities that can win them free digital cash from malicious actors. Second, it becomes permanent once a smart contract is issued, like any other information stored on the blockchain. This means you won't be able to repair it, even though you find a bug in a smart contract. A new version of the smart contract may be released with a new address containing the corrected code, but the old one will still remain.

What this means is that developers have to do whatever they can to get the code correct on the first run, unlike conventional apps, where we're used to going through cycles of publishing and repairing code, with smart contracts.