What is Smart Contract and What Problem Does it Solve – Explained

1994. That was the year when American computer scientist Nick Szabo, often considered as the person behind the pseudonym Satoshi Nakamoto, proposed the concept of a smart contract for the first time.

In general, contracts are agreement papers that have a set of terms and conditions that clearly define how to process a transaction, and outlines the role and responsibilities of the parties involved in it.

If you replace the same terms and conditions in a conventional contract paper by lines of codes that self-execute when certain conditions are met by the parties involved in a transaction, you’ll have a smart contract.

Smart contracts are contracts embedded in a blockchain, which makes the whole process entirely or partially decentralized. Upon the deployment of the smart contracts, it’s practically impossible to alter its code.

Smart Contract Definition

To put it simply, smart contracts are digital contracts that automatically process transactions when each of the encoded terms of the agreement is met by the transacting parties.

Why Do We Need Smart Contracts?

Now that you understand the basic definition of a smart contract, the first question that must have come to your mind is, why do we even need a smart contract.

To understand that, consider that you are buying a property for which you need to request a mortgage loan from your bank. Funds approvals and deposit is a multi-step process that involves many parties and lots of regulatory paperwork. You will have to fill in your personal information, contact all the intermediaries involved in the transaction, get signatures and so on. This not only consumes a tremendous amount of time but also adds up to the total cost considerably. And all of this because there is a lack of trust between the transacting parties.

Fast forward to the future when smart contracts are mainstream, and you are planning again to buy a property by taking a loan from a bank. You will be able to verify your identity using your digital identity stored on the blockchain. From the loan approval to the transfer of ownership, every successful transaction will be transacted in the matter of minutes and recorded on the blockchain.

This is how smart contracts eliminate the need for trust and make transactions faster and more secure.


Smart Contracts Benefits

In light of the above example, the use of smart contracts make transactions:

  1. Direct (no need of intermediaries)
  2. Cost efficient
  3. Time efficient
  4. More secure
  5. Extra fraud-resistant

What are Smart Contracts Use Cases?

With the above-mentioned benefits of smart contracts, there are many industries that can implement them to optimize their internal processes.

  1. The banking industry can reap the benefits of significant time and cost savings in processing loans and other transactions.
  2. Medical and healthcare industry can use them to access patient identity and cross-institutional data, therefore providing better medical services.
  3. Smart contracts can use smart contracts to streamline supply chain processes and negate the inclusion of counterfeit products.
  4. Real estate markets can use smart contracts to process a large number of property transactions and to reduce intermediaries, resulting in denoting cost and time savings.
  5. Energy industry can make the trading of energy commodities easier and more economical through the use of blockchain and smart contracts.
  6. Gaming industry can use smart contracts to maintain transparency between game developers and gamers, and also provide instant payments to developers when their games or in-game products are bought.
  7. Insurance industry can use smart contracts to reinitiate the trust between insurers and customers by making sure that companies pay out the eligible sum to customers and the customers do not make false claims to receive illicit payouts.

Apart from these, there are numerous other places where the use of smart contracts can make the system more efficient and trustworthy.

Ethereum Smart Contract

Most of us associate blockchain with bitcoin, it’s most shiny and known use case. Ethereum, another groundbreaking cryptocurrency and blockchain platform was launched, by 18 years old genius developer Vitalik Buterin. Ethereum smart contracts allow for design, development and scaling of thousands of versatile applications. It’s Virtual Machine (EVM) Turing complete software enables simultaneous execution of operations by every node in the Ethereum network, resulting in faster and easier blockchain creation.

So how does typical Ethereum smart contract work?

Ethereum smart contracts are enforced and certified by parties called miners (GPU heavy servers), that use consensus protocol called Proof of Work (PoW). Each transaction or operation on the Ethereum network has a cost, expressed in Gas, a measure of the computational use of the unit. Gas price and limit are correlated to costs of launch a decentralized application (dApps) or development of decentralized autonomous organization (DAO). Ethereum miners add a transaction (eg: cryptocurrency payment, smart contract operation…) to a new block on Ethereum network., which as explained is a cost of executing smart contract operations. When smart contract is published or smart contract function executed, money verified and transferred to another account, miners get paid with Gas.

To learn more about Ethereum Smart Contracts, check this compelling video:


Ethereum Smart Contract Audit

Smart Contract Audit is the same as a conventional, standard code audit. It uncovers security vulnerabilities before the code is deployed to a production environment. The smart contract audit process includes automatic and manual penetration testing. Automatic audit targets commonly encountered security vulnerabilities, while manual audit tests for business logic vulnerabilities.

TheBlockBox smart contract audit process consists of manual code audit and security audit performed by automated tools. In this process, TheBlockBox team analyzes smart contract’s functionalities, and performs necessary checks against known vulnerabilities. The focus of the audit is to inspect a smart contract to trace and negate any potential for fund losses.

Smart contract audit report with clearly defined audit metrics provides an estimate of the overall severity of vulnerabilities. The report also exhibits categorized vulnerabilities, using risk rating structure based on impact and likelihood scores. Audit reports are typically requested by smart contract developers, product owners of decentralized apps, or CIO/CEOs.

Hyperledger Smart Contracts

Ethereum (a public, permissionless blockchain) and Quorum (private, permissioned blockchain based on Ethereum code) are based on execute-order architecture. Some of the limitations that this introduces are sequential execution of all transaction which directly affects transaction throughput. The main concept that differentiates Hyperledger Smart Contracts from other blockchains is its execute-order-validate architecture.

Hyperledger Smart Contracts domain is referred to as the chaincode. Chaincode is a program which implements application logic and can be written in general purpose programming languages such as GoLang, Java, NodeJS. This allows easier and wider adoption by software developers in contrast to domain-specific programming languages.

At this point, Hyperledger is one of the most mature and stable platforms for smart contracts development, as it offers great performance with high transaction throughput, privacy and modular consensus protocols.

Does Your Business Model Require Smart Contract?

Smart contracts, as you saw, have enormous potential to disrupt many major industries and businesses. If you’re wondering how you could use smart contracts to foster your business growth, or if you already have an idea waiting for implementation, we would love to hear your out.

At TheBlockBox, we’re a team of blockchain and smart contract development experts who help enterprises and startups design blockchain-based products, and develop and implement effective smart contracts solutions.

Drop us a line, and we’ll make sure you get the best out of blockchain and smart contracts.