Blockchain is a decentralized system that exists thanks to many networked computers. Therefore, one of its main advantages is that you can avoid paying intermediaries and save your time and nerves.
Blockchain has its drawbacks, but it is faster, more reliable and more secure than traditional systems, which is why banks and government organizations are increasingly using this technology for their needs. The principle of blockchain operation is shown in the infographic:
In 1994, Nick Szabo, a legal scholar and cryptographer, realized that smart contracts, also called self-executing, digital or smart contracts, could be created using a decentralized ledger.
Such contracts can be written in code, stored and duplicated in the system, and their execution will be ensured by a network of computers that manages the blockchain. Also, using the registry, it will be possible to transfer money to each other and receive goods or services.
What are smart contracts?
Smart contracts allow you to exchange money, property, shares or other assets without resorting to intermediaries.
In order to conclude a regular transaction, you need to go to a lawyer or notary, pay and wait for the documents to be processed. Smart contracts work like vending machines: you simply throw Bitcoin into the machine (that is, into the ledger), and the contract, driver's license, or any other service you ordered stored with a third party drops into your account.
In addition, unlike traditional agreements, smart contracts not only contain information about the obligations of the parties and penalties for violating them, but also automatically ensure compliance with all terms of the contract.
Smart contracts are an electronic algorithm that describes a set of conditions, the fulfillment of which entails certain events in the real world or digital systems. The implementation of smart contracts requires a decentralized environment that completely eliminates the human factor, and to be able to use value transfer in a smart contract, cryptocurrency is required. Wikipedia definition.
At a recent blockchain summit in Washington, Vitalik Buterin, a 23-year-old programmer and creator of the Ethereum project, explained that in a smart contract, an asset or currency is transferred to a program that enforces a set of conditions.
At a certain point, this program confirms that the contract has been fulfilled and automatically determines whether the specified asset should go to one of the parties to the transaction or immediately return to the other party (or maybe the conditions are a little more complicated). All this time, the document is stored and duplicated in a decentralized registry, which ensures its reliability and does not allow either party to change the terms of the agreement.
Let's look at a specific example of a smart contract
Here is the code written for a regular smart contract on the Ethereum blockchain platform. Contracts can be written on any blockchain, but Ethereum is the most popular because it provides unlimited possibilities for writing and working with smart contracts.
An example of a smart contract written on the Ethereum platform. Source: www.ethereum.org/token
It says that the creator of the contract should receive 10 thousand bitcoins. This contract allows anyone with enough funds in their account to transfer bitcoins to other people.
Practical application of smart contracts
Using smart contracts, you can simplify work in many areas of life, including logistics, management, law, and even elections.
Elections
According to experts, it is almost impossible to falsify election results, but thanks to smart contracts, the possibility of external interference in the voting system can be completely eliminated.
In this case, voter votes would be placed on a distributed ledger, requiring exceptional computing power to decode them. Such computers do not exist, so it will be impossible to hack this system.
Management
Blockchain not only offers a secure and transparent shared ledger, but also helps avoid misunderstandings when working together or situations where parties draw up contracts independently of each other.
Logistics and supply
Bitcoin Core protocol developer Jeff Garzik says:
“UPS can execute contracts that say, ‘If we receive payment for delivering a product, the manufacturer, many steps up in the supply chain, will immediately begin creating a new product because that product has already been delivered.”
Procurement too often suffers from bureaucracy, with different forms having to be approved by multiple authorities. Because of this, scammers get the opportunity to make money, and companies suffer losses. Blockchain avoids these problems because each participant in the supply chain has access to a secure electronic system that controls work progress and payments.
Thus, Barclays Corporate Bank uses smart contracts to register the transfer of ownership and automatically transfer payments to other financial institutions.
Cars
Think about a future where everything is automated. Google is already building on it, creating smart phones, smart glasses, and even smart cars. And this is where smart contracts come to the rescue.
Take, for example, self-driving or self-parking cars. Smart contracts will determine who is to blame for an accident: the sensor or the driver, and will also help in resolving any other situations. With the help of smart contracts, insurance companies can set premiums depending on where and under what conditions drivers operate vehicles.
Other areas
Other industries, such as acquiring, lending and accounting, will also use smart contracts - for example, for risk assessment and auditing in real time. Lawyers will be able to move from drafting traditional contracts to creating standard models of smart contracts. And on the Blockchain Technologies website, smart contracts have turned into an electronic-paper hybrid: they are confirmed by the blockchain and receive a material embodiment in the form of a paper copy.
Patrick Hubbard, Principal and Senior Product Marketing Manager at SolarWinds:
“The Yangon Stock Exchange in Myanmar makes payments using a distributed ledger. Of particular interest are those functions of blockchain that go beyond traditional uses of the technology. Thus, the Yangon Stock Exchange managed to solve the problem of settlements made at different times in a trading system that synchronizes trading only twice a day. Due to the fact that smart contracts themselves ensure the execution of transactions, blockchains with their reliable transaction system can be used in situations where complex operations are required that depend on various changing factors. That’s why Amazon, Microsoft Azure and IBM Bluemix are focusing so much on developing cloud-based blockchain-as-a-service technology.”
Pros of smart contracts
If we consider smart contracts when used in different spheres of life, we can highlight a number of important advantages. Among the advantages:
- independence - you no longer need to resort to the services of intermediaries to conclude transactions;
- security - the smart contract is located in a distributed registry, its terms cannot be changed;
- savings - by getting rid of intermediaries, the parties to a smart contract can cooperate on more favorable terms;
- no costs - if the terms of the contract are fulfilled, the parties immediately exchange assets.
Summary
The appearance of HYIPs on smart contracts is a big step in the development of the HYIP industry. These are new opportunities for both administrators and investors that have not yet been fully appreciated. Not many projects built on smart contracts have been able to show their worth, but with proper management, such funds are capable of a lot.
I think that in the future there will definitely be development in this direction and with the growing number of cryptocurrency users we will see more and more new and interesting hypes on smart contracts.
Denis HyipHunter Knyazev
Blog creator. Private investor. He has been making money in highly profitable investment projects and cryptocurrencies since 2014. Consults partners. Join the blog's Telegram channel and our chat.
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Disadvantages of smart contracts
Smart contracts are far from perfect. What if there are errors in the code? How should the state regulate these contracts? And how will it collect taxes on such transactions?
The list of possible problems is not limited to this. Experts are trying to solve all the issues, but such difficulties repel many potential users.
Smart contracts cannot be called an ideal tool for building relationships between people. They also have several disadvantages. Among the disadvantages:
- legal status - for the operation of smart contracts, cryptocurrency is used, but it is not yet accepted as an official financial instrument;
- errors - to draw up a smart contract, you need to specify all sorts of conditions and options for the development of transactions; the more complex the process, the more difficult it is to create a smart contract;
- lack of understanding - most users still have little understanding of what smart contracts are.
Despite the above disadvantages, smart contracts have a high potential to gain a foothold in our lives in the future. They will become increasingly used as things become connected to the internet.
Advantages and disadvantages of smart contracts
| Advantages | Flaws |
| exclusion of intermediaries from the transaction | creating a contract yourself requires knowledge of programming basics |
| free of bureaucratic fuss | if an error is made in the bytecode, it can violate the interests of the parties and be vulnerable to hackers |
| minimum transaction costs | the information included in the block is not subject to change; accordingly, the terms of the transaction cannot be revised |
| the ability to enter any conditions and apply in any area | To pay for the contract, cryptocurrency is used, the use of which in most countries is not yet regulated by law, which means that in the event of an error in the code, the injured party should not expect compensation even through court |
| the legality of the transaction is verified by independent communication centers | insufficient prevalence does not yet allow full use of all the advantages of smart contracts |
| contract code cannot be tampered with or changed | |
| Anyone can create a contract |
Blockchains, where can you conclude smart contracts?
Ethereum : An open blockchain platform that is best suited for writing and working with smart contracts. You can create any program, but you will have to pay for the computing resources of the platform with ETH coins.
NXT : This is an open blockchain platform with a limited number of smart contract samples. You can only use what's there; You can't write your own code.
Bitcoin : An excellent blockchain for Bitcoin transactions, but limited document processing capabilities.
Side Chains : Another name for blockchains parallel to Bitcoin that provide slightly greater contracting capabilities.
How smart contracts work
The parties sign a smart contract using methods similar to signing the transfer of funds in existing cryptocurrency networks.
SC logic is written into a block (cell of the blockchain system) and combines messages related to a specific contract and acting as code inputs and outputs with subsequent execution of actions outside the blockchain.
Required SC elements:
- application of an electronic signature based on encrypted and public keys belonging to all parties to the agreement;
- the presence of a decentralized network (for example, Ethereum), in which SCs are registered and which supports inputs and outputs for oracles - connecting links between the real and virtual world;
- strictly specified conditions for the implementation of the SC, confirmed by the signature of its participants;
- in fact, the subject of the contract and the tools for its implementation (settlement accounts, oracles, etc.).
