What is a smart contract?

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A smart contract, or literally “smart contract”, is a special computer algorithm created for entering into self-negotiating contracts in the blockchain. They are a code that works within the blockchain network. In a simpler language, smart contracts are a special feature inside the blockchain that is needed to conduct transactions. Smart contracts are self-fulfilling and automated, which means that no one party can violate the terms of the contract, all write-offs, control, imposition of sanctions on the side that has not fulfilled its obligation automatically. In addition, the smart contract has the same properties as cryptocurrency - they do not need an intermediary in the person of any financial organization or state.

Origin of smart contracts

The idea of a smart contract was proposed by the scientist Nick Szabo in 1994, but the realization of the idea became possible only in 2008, with the development of blockchain technology. Szabo represented a smart contract as a computer Protocol that would automatically perform operations and monitor their execution. As a result, with the advent of the first cryptocurrency bitcoin, the implementation of the idea of smart contracts became possible, though not in the full version. Bitcoin code allows you to enter into contracts with a fairly simple set of functions. For example, multi-signature for transactions with deferred payment. These are the transactions that are carried out only if the majority of participants confirm it. For example, a person wants to buy a product in an online store. It involves the seller and the arbitrator, a special account is created. The buyer transfers money to this account. The seller sees the receipt of funds and sends the goods. After that, the seller creates a transaction from a neutral account to his own, but without the approval of the buyer or arbitrator, the money will not be transferred. As soon as the buyer receives the goods, he puts his signature on the transaction and on the principle of 2 out of 3 money goes to the seller. Or, in case of disagreement, an arbitrator is involved, whose signature also affects the transaction. Similarly all the systems work based on the principle of N signatures of T. This algorithm can also be used in elections or voting. In this case, it will be impossible to falsify the results if each user is identified. Returning to smart contracts-they fully appeared in the blockchain of another cryptocurrency – Ethereum. The creators of this project initially said that bitcoin is not suitable for smart contracts, because it was not developed for this. The developers started their project immediately taking into account the use of smart contracts.

How do smart contracts work?

Smart contracts are fixed in the blockchain. The logic of the contract is fixed in the block, there are fixed and all messages related to a particular smart contract. Messages are the inputs and outputs of program code that can lead to any action in the digital or real world.

When entering into a smart contract, a number of conditions must be met:

1.Application of an electronic signature based on public and private keys held by two or more parties to the contract

2.A private decentralized environment in which smart contracts are recorded and which supports inputs and outputs for oracles that communicate real and digital spaces;the subject of the contract and the tools for its execution

3.Accurately described and confirmed the terms of the contract.

Smart contracts come in several varieties depending on the degree of automation and are divided into:

1.Automated-no copy on paper, existing exclusively in the digital world;

2.With a paper copy;

3.Completely on paper with automation of a small number of processes, for example, only payments.

According to experts, due to the low development of blockchain technologies (despite the popularity), the third type of smart contracts is now mainly used. For example, at the end of September, an apartment in Kiev was bought using a smart contract in Ethereum, while the seller was in new York.

Prospects of using smart contracts

The most promising industry in which smart contracts can be used is banking and Finance. Experts believe that in the future smart contracts will find their application in insurance, accounting, audit, supplies, logistics, voting systems, registration of property rights and so on. Another area in which smart contracts are already actively used is ICO. Investors and developers enter into a smart contract, under which, if the project does not collect the required amount, the money is automatically returned to the sender, and if the project is successful, the money will go to the developers ' account only if more than half of all investors put their signature on the transaction.

Advantages and disadvantages of smart contracts

As with everything, smart contracts have their pros and cons. Proponents of smart contracts argue that they are far superior to conventional contractual relationships, as many transactions may well be made automatically, smart contracts reduce operating costs, avoid ambiguous interpretations, and are independent of legal systems and court decisions that may not be fair.

The following advantages can be distinguished:

1.Autonomy-there is no need to involve third parties in the form of banks, notaries and so on;

2.Security-the transaction is stored in the blockchain on multiple computers at the same time and is not subject to change;

3.Efficiency and economy - in the absence of intermediaries increases the speed of transactions and reduce costs;

4.Human factor-processes are automated, which means that human errors are excluded, unlike the situation with traditional transactions.

But there are also disadvantages of smart contracts. However, experts note that these disadvantages are associated with underdevelopment of technologies and will be corrected in the future. However, now it is worth noting a few of them: Lack of flexibility compared to conventional contracts; weak development of oracles that supply smart contracts with the necessary data from the real world (for example, stock market reports for financial transactions). Errors in the code, which are still encountered and are the cause of cyber attacks on digital wallets.

All health and profit.