Why are Smart Contracts Important?

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gingerbreadfork
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7 min read

What is it about smart contracts that is changing the way we look at everything from ownership to finance.

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Blockchain technology impacts the world in various ways; one of the most significant ways this occurs is through the increased use of smart contracts. You may have interacted with a smart contract and not realized it, or perhaps you are just curious about what they do. Whatever the case, smart contracts are an exciting topic and one that any cryptocurrency enthusiast should spend a little time learning about. So let’s dive into exploring what smart contracts are, the history of smart contracts, and more.

What are smart contracts? Is this blockchain technology the future of reducing counterparty risk, or is it merely a technical buzzword of the cryptocurrency age.

What is a Smart Contract?

A smart contract is a piece of software that controls the outcome of a transaction. For example, a smart contract can contain the rules, terms, and verification of the transaction involved. It can also be used to guarantee the execution of a transaction once a particular set of conditions is met.

With Smart contracts, it’s possible to decentralize agreements and contractual obligations by removing excess third-party intervention. One area where smart contracts shine is their ability to eliminate the need for the parties involved in a transaction to trust each other. This reduction of doubt opens the doors for quite advanced and risky transactions to take place with reduced risk and without the need to trust the other parties involved, provided you trust the smart contract.

While smart contracts can perform relatively simple transactions, they can also scale to deal with more significant problems, interact with each other, or interact with the outside world with the right kind of help (blockchain oracles). As a result, smart contracts are finding more use cases every day as blockchain developers look to solve problems in the outside world.

What was the First Smart Contract Platform?

Around 1997 the first public proposal for smart contracts was made by a computer scientist called Nick Szabo. The man who also invented a virtual currency called "Bit Gold," which was first proposed publicly around 2005, is considered a precursor to bitcoin and features many of the same features, including mining using a proof-of-work algorithm.

While back when first proposed, actually putting smart contracts into practice wasn't practical, the definition and description have been impressively sound and could be considered well before its time. In the following years, the launch of bitcoin proved that cryptocurrency was indeed a viable concept, which led to the launch of Ethereum, the first smart contract platform, finally allowing smart contracts to thrive.

These days smart contracts have spread across blockchains and into a range of different projects. While easily the most well-known, Ethereum was once the gold standard for smart contracts and arguably still is. Still, many more projects are taking to this technology, forming their own implementations, and exploring additional use cases.

Smart contracts are beginning to test the waters in almost every industry, providing not just solutions but potentially increased efficiency. Thus, what was once just an idea that couldn't be fully realized is now only likely to grow with more time and development. In recent years the interest in smart contracts has even led to this topic branching out into blockchain oracles which allow for access to external data feeds (potentially in real-time) and make an interesting topic in their own right.

Are Smart Contracts Trustless?

As smart contracts are a feature of some blockchains, they benefit by inheriting some of the core strengths of blockchains themselves. While these aren't hard and fast rules, they are often quite reliable. Firstly, a smart contract cannot be easily tampered with or changed; this assures that the contract can be considered both firm and immutable. While some edge cases can affect this, such as the stability of the chain on which that smart contract is based, it's a fair statement in most cases.

They also benefit from the decentralization that comes with many blockchains. For example, suppose the blockchain securing the smart contract is well established. In that case, you can ensure a transaction is valid once it has been confirmed sufficiently by the network as you would a regular transaction. In addition, the distribution of blockchains can reduce attempts to attack the smart contract with some form of fraudulent behavior as the rest of the network would see any attempts to lie or provide a false outcome as invalid and void the results.

You don't have to rely on another person, business, or third parties with their own motivations to perform the transaction. Bias can crop up in many often unpredictable ways and cloud the resulting outcome of a decision. Using smart contracts reduces the need for trust and the liability that comes from adding a human element into the mix and reduces the risk of involving third parties in your contract at all by replacing them with code.

Something that many people seem to be craving in modern times is more transparency. Instead of calling for third-party audits, when it comes to transactions performed with a smart contract on-chain, these can be independently verified by anyone interested in the results. Transparency can be a feature that is enabled by default when using smart contracts.

How Fast are Smart Contracts?

Unlike manual intervention, a smart contract can be highly efficient due to automation. This increased potential for speed makes it extremely useful for mission-critical tasks. Unlike dealing with the delays of a human pipeline, smart contracts can reduce the friction it takes to get the job done. Smart contracts also increase availability; whatever the time, smart contracts can work to get the job done. There is no waiting on having your contract executed due to delays with paperwork or common everyday concerns. The only thing that can slow you down is straightforward issues like network congestion.

Is it Cheaper to use a Smart Contract?

While this doesn't account for all potential costs, many services involving notaries and the like can be pretty expensive. Reducing and removing as many potential costs associated with these services can lower ongoing expenses, especially for a frequent type of transaction.

Removing intermediaries from any transaction can be significantly beneficial from a cost standpoint. Of course, trust is required, and the smart contract can provide this in an ideal circumstance. The transaction costs for this type of blockchain technology will often dwarf the money spent when having an arrangement handled by traditional legal means.

Are Smart Contracts Accurate?

When it comes to smart contracts, code is essentially law. If the code is reliable, you can rely on your smart contracts to provide you with accurate results time after time. Manually performing tasks will always result in some form of errors or mistakes from time to time. If accuracy is vital, smart contracts can often help. Smart contracts rely on their set terms. Smart contracts can be incredibly beneficial in trusting an agreement or ensuring the transaction terms are upheld.

Record keeping can be painful; what's worse is when you lose records. However, document loss can be less of a concern when operating a smart contract on a public blockchain. Provided the blockchain is maintained and continues in its current form, you are unlikely to need to be concerned about both your record keeping and the validity of your records. Nonetheless, you can never have too many backups. You can also use the blockchain to compare and validate your records at any time, allowing for increased peace of mind and increased accuracy.

Smart Contracts and Tokens on Ethereum

While you can use smart contracts on the Ethereum network itself, you can also mint and manage tokens. As a result, digital tokens have a lot to thank smart contracts for and have led to the rise and usability of tokens on Ethereum and other blockchains.

You can use smart contracts to manage the supply of a token and many other variables that can help bring a token to life and make it a functional asset that can do more than being sent and received. The power of having control over the event and reaction cycle can create quite complex functionality, something we see in the current DeFi (decentralized finance) boom and even the NFT movement.

Solidity, the high-level programming language developed for implementing smart contracts on Ethereum, allows developers to govern transactions on the ethereum network. Interest in developers with the ability to program Solidity competently only seems to be growing. Furthermore, it is an interesting employment path to consider pursuing if you are interested in blockchain technology. Either by using the help of third-party tools and templates or digging deep and developing very custom smart contracts, you can create platforms, tokens, and products that could shake up traditional alternatives or create new avenues to explore.

Are Smart Contracts Legally Binding?

Often those in the cryptocurrency space will argue against the need for more regulation. However, this is where smart contracts can face quite a significant hurdle. The lack of sound and broad regulations makes it hard to rely legally on the outcome of a smart contract; even getting a court to acknowledge the validity of the process at all could be significantly difficult.

As the adoption of blockchain increases, regulators and those in the legal field are beginning to understand how smart contracts work and how they could affect the future of contract law. Perhaps one day, what we see as a binding agreement on the blockchain could spill over into a reliably binding contract in the courtroom as well, and this computer code could begin to have a significant effect on the way legal disputes are managed in some cases.

Are Smart Contracts the Future of Finance?

When it comes to smart contracts and their true potential, the reality is that we simply don't know yet. As for how disruptive smart contracts will genuinely be, only time will tell. However, what has become clear is smart contracts seem to be here to stay, and with further advancements, their growth could begin to affect many facets of our everyday lives behind the scenes. Even today, it’s not uncommon for tens of millions of dollars in value to be locked in smart contracts that have only just launched, which says a lot about their potential moving forward.

With more potential arising all the time, alongside advances in smart contracts and trustless oracles, the crypto space as a whole will likely continue to shake up the world of tomorrow just as it has begun shaking up the world today.

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