Smart contracts are similar to contracts in the real world however, they are digital and have the ability to remove a third party intermediary.
Smart contracts are digital contracts with predefined requirements that must be met before a transaction can be processed. Smart contracts remove the need for third party intermediaries and live within the blockchain which allows people on the ledger to verify transactions and assist in making it safe against attackers.
The term smart contract was first used by Nick Szabo, a computer scientist known for his research in digital contracts and digital currencies. He graduated from University of Washington in 1989 with a degree in computer science and also graduated from George Washington University Law School with a degree in law.
He was the creator of ‘bit gold’ – a mechanism used within decentralized, digital currencies. ‘Bit gold’ was never implemented; however, it has been said that it had direct implications on the way Bitcoin was created.
Smart contracts are immutable as they can not be tampered with or changed. Smart contracts live among the blockchain and are a group of blocks holding a set of requirements. These blocks can’t be changed as all users on the ledger will be able to see this and therefore not verify the transaction.
Smart contracts are more efficient than non-digital contracts as they remove the need for a third party. If all the requirements on the smart contract are not fulfilled, the transaction will not be processed on the blockchain and it will be as if nothing ever happened. Numerous aspects contribute to making smart contracts safe and work through a more systemized transaction process.
For example, a smart contract could be used for the funding of a firm. If the people investing in the firm don’t reach the specified target price the smart contract is set at, the funds will automatically return to those who have elected to contribute to the funding of the firm.
If the smart contract didn’t have predefined requirements, a third party intermediary would have been needed. This third party would have to be a site or service (most commonly an escrow service) in which the investors would need to trust in order for the site to hold their money. The investors would also have to agree to the conditions the third party site had created. The firm would also have to trust the third party intermediary. This would most likely result in the third party taking a percent of the transaction for being able to connect the fundors with the firm and would also result in the unnecessary lengthening of time it takes to transact. Smart contracts allow for a single more efficient transaction to take place.
What is a Smart Contract in Blockchain?
The blockchain can be defined as a decentralized, digital network that tracks monetary transactions. Smart contracts are built on the blockchain and allow for advanced transactions to occur between buyers and sellers; this could be meeting predefined requirements before an autonomous processing of transaction will occur.
The blockchain is a peer-to-peer network where all users can publicly see and verify each transaction that occurs. This is what makes the blockchain reliable and resilient. Peer-to-peer means numerous computers around the world are running the software which makes the blockchain decentralized. This means that the software is not run by a specific group of centralized people but rather verified by everyone on the blockchain network.
Some blockchains support smart contracts. This is one technical capability our team thinks will enormously affect the price of certain coins and NFTs; this is one aspect we encourage investors to look at before choosing which cryptocurrency or NFT to invest in.
The Ethereum network is the most widely used framework that supports smart contracts. The network uses a programming language known as solidity. Bitcoin is another coin that has additional value by allowing peer-to-peer transfers of money. Bitcoin uses a programming language known as script. Script is similar to smart contracts in a sense. However, it is not as advanced and the framework is not as developed.
What Can Smart Contracts be Used for?
Smart contracts can be used in a variety of different fields and have the potential to make many firms within different industries rethink the way they operate. The implications and use cases continue to grow for buyers and sellers as they are secure, fast, and unable to be manipulated.
Smart contracts are built on the blockchain network which is where all the transactions are processed. These transactions are kept on a public database and are able to be processed in a single transaction. As stated previously, this removes the need for a middle man and brings immense benefits like faster transaction speeds. Each contract has code written within it which makes it impossible for the agreement to be manipulated.
An example of an industry in which smart contracts can be used for is the supply chain or how an item gets from where it was manufactured to the delivery point. Monitoring and tracking the processing of items can allow companies to create a digital fingerprint for the item.
This will help in solving manufacturing issues as the company will be able to see which step in the process caused the item to be damaged or go missing. The typical paper based system creates lots of opportunities for people to easily manipulate the results whereas a completely digital contract can’t be lost or manipulated.
An example of another industry that can use smart contracts in a variety of different ways is healthcare. After each appointment in which a person goes to see a doctor, the information can be stored on the blockchain for insurance companies to verify and have proof of what actually occurred.
Private information about a person’s health could be stored on the blockchain and only a limited number of people would have access to the private key (which points to where the personal information would be stored). This would prevent personal information from prying eyes as it would securely store the information and eliminate the need for paper.
Improved protocols would also benefit from smart contracts as a person would only be able to qualify for a specific drug if they met the qualifications specified by the doctors who created the smart contract.
This industry is another one in which smart contracts have numerous use cases. For example, if someone created an insurance claim, the blockchain technology would allow for insurance companies to look at what actually happened and approve the claim in a single transaction. This would send funds to the insured party if the requirements are met.
Bookkeeping would also be much safer as firms would not be able to adjust certain aspects of the financial books. Most firms have a database software program that automatically updates; now, records could be kept in real time and stored within the blockchain allowing accountants to easily verify that no records are being falsified. This would help in reducing accounting costs.
Smaller contracts or loans can automatically be issued if a person meets the criteria within the smart contract. This would eliminate the need for a person within the banking industry to verify that the person qualifies for smaller loans. This would save individuals and small businesses enormous amounts of money and time.
Smart Contracts have huge implications within the NFT world. If you are looking to learn more about NFTs and would like to become an expert, we have created an in-depth explanation which we have linked to here. The digital art world and NFTs are a growing industry and one aspect that has accelerated the growth is smart contracts.
The digital art industry and NFT world often faces the problem of proof of ownership. Smart contracts allow for the creator of the digital piece to add in the ability to transfer and trace ownership using blockchain technology. This is known as provenance and our team has an in-depth article explaining exactly what provenance is and how it affects NFTs; we have linked to that article here.
Smart contracts have the ability for artists to receive commission when the digital asset changes hands. This is something that is not possible with physical art as there are no legally binding documents stating royalties can be embedded. Once physical art is sold, complete ownership is given to the purchaser and no additional perks can be given to the creator.
History is filled with enormously gifted artists (and musicians) dying penniless only later to see their work explode in value.
What Are the Top 10 Smart Contract Platforms?
- Stellar Lumens
While there are numerous smart contract platforms available on the market, our team has hand selected the top 10 in our subjective analysis and we think many others would agree with us.
These coins are constantly being updated and since there are so many available on the market we find it challenging to pick only 10. We have also created a short description of each project along with some additional information that may be helpful to you.
Our team recommends you do your due diligence before investing in these cryptocurrencies and we recommend you take into consideration that this is a very rapidly changing technical environment.
Ethereum is currently the most used smart contract platform. It is based on the software language known as Solidity. Ethereum runs on EVM or Ethereum Virtual Machine which is a sophisticated software. The Ethereum blockchain supports ERC20, ERC1400, and ERC721 smart contracts.
Numerous projects are built using the Ethereum blockchain as it allows for decentralized applications (dapps). Anyone can create a smart contract on the Ethereum blockchain as long as they are able to create it using code that is written in smart contract language. The user must also have enough ETH to pay the gas fee or the processing of the transaction.
Cardano was founded by Charles Hoskinson – a co-founder for Ethereum. He created the project in 2015 and it launched in 2017. The project was also cofounded by Jeremy Wood who also worked on Ethereum.
The project is built using (PoS) proof-of-stake mechanism which allows holders to receive income proportional to the amount the user is holding. Cardano is built with the goal of improving scalability, dealing with smart contract security issues, and issues with the traditional financial system.
One aspect of Cardano that allows for wide scalability is the use of Marlowe. Marlowe is an assistive program that allows users without technical knowledge to create smart contracts. The coin is third generation and we think the coin has the potential to really gain widespread adoption as development continues.
VeChain (VET) was created by Sunny Lu in 2015 and the team working for VeChain currently consists of over 90 employees. VeChain began on the Ethereum blockchain however it later transitioned to a blockchain of its own as the company saw growth. People often refer to the coin as ‘the Ethereum for business’.
VeChain focuses specifically on smart contracts regarding supply chain management, aspects like product tracking, and management of inventory. The team’s goal is to disrupt the current way the supply chain runs through improving the technology. It is intended for mass business adoption, with a focus on supply chain smart contracts.
Neo means new and young in Greek and was created by Da Hongfei in february of 2014. It is considered the ‘Ethereum of China’ and it is very scalable as it is aimed to work across public chains, consortium chains, and even private chains. Neo uses proof-of-stake mechanisms discussed earlier.
The aspect that makes Neo so appealing is the ease in using different codes that can be easier for people to program. Like Ethereum, it is based on the Solidity programming language however, numerous other languages are supported by Neo. This makes it easier for programmers to use the platform and makes it more adoptable.
Ripple (XRP) was engineered by Jed McCaleb, David Schwarts, and Arthur Britto. It was created with the vision of facilitating transfers of money across borders in an affordable and fast way. Developers within Ripple are closely working with employees at banks and institutions to understand how the process can be improved.
Working with the flare network, Ripple is able to execute Ethereum smart contracts on the XRP ledger. Ripple works using a two step process. The first is to use a node to see logs. The second, is by creating the commands for smart contracts to be executed. Numerous uses can be found within the XRP ledger. Banks often charge high fees for converting one fiat currency for another and Ripple makes the transaction possible with minimal fees.
Jed McCaleb, a cofounder of Ripple and Joyce Kim, a former lawyer, created the Stellar Lumens (XLM) project. Stellar Lumens has numerous aspects that make it an excellent smart contract platform.
The first aspect that makes XLM a good smart contract platform is that it allows for multi signatures. This means numerous parties can agree upon the smart contract through signatures. The Stellar Network also uses batching, which allows for multiple operations to occur in a single transaction.
Stellar Lumen also has the ability to use sequences, which makes it possible for smart contracts to have an order for a series of transactions to be processed. If the order is completed but not in the order the contract was coded in, no transaction will be processed. Time bounds can be embedded in the smart contracts as well; this means, limitations as to when a specific task must be completed can be included. If the time frame for a task to be completed ends, the smart contract will not be processed.
EOSIO is a blockchain protocol based on the cryptocurrency EOS. It was created by Brendan Blomer and is aimed to be the most powerful infrastructure for decentralized applications to be built on while promising no transaction fees. The network is able to process and manage millions of transactions in a single second.
The EOS network is an open blockchain platform that is considered more scalable as numerous coding languages are accepted by the network. Users are able to work on the EOSIO public blockchain, build and deploy their own EOS blockchain, or use other EOSIO blockchains.
Stratis (STRAT) was created by Chris Trew and is built on the bitcoin full node platform. It also uses a proof-of-stake mechanism, which we have previously covered. Stratis aims to provide solutions to businesses to ensure they can test and develop projects securely; it also has the goal of accelerating the production of blockchain projects.
Stratis primarily targets businesses or firms. Smart contracts can be developed and deployed on the Stratis full node. One interesting aspect about the company is that they offer consulting services for firms who may need additional guidance using the blockchain the team has built.
Tron (TRX) was founded by Justin Sun in 2017. Justin Sun is an established name within China; he was handpicked by Ali Baba founder, Jack Ma, to study at his established university: Jack Ma Hupan University.
Tron is specifically designed to help MLM business which is multilevel marketing and allows for the removal of the middlemen in the transaction extensive process. With automation and immutability, the Tron smart contract platform has very high potential. The network is used by numerous people because of the low transaction fees.
Qtum was created by a team of people with Patrick Dai being considered the main founder. The team is Singapore based. Qtum is built using the smart contract platform from Ethereum and with Bitcoins blockchain.
The coin is built using proof of stake mechanisms. It is the only blockchain in which proof of stake powers the blockchain it runs on. Qtum uses a version of Ethereum’s virtual machine and is built for the adoption of large corporations and developers. Developers claim it was built with an additional layer of safety.
What Are the Problems With Smart Contracts?
The technology surrounding smart contracts is relatively new and therefore it is constantly being updated and changed. As of now, the main problems surrounding smart contracts include: solving disagreements between stakeholders, the cost associated with smart contracts, and issues within smart contract coding.
There are so many implications for smart contracts and the technology is constantly being improved. Our team here at NFTexplained.info thinks that with time, this revolutionary technology will have very minimal problems and that smart contracts will be implemented in a variety of different industries.
A particular challenging issue is disagreements between stakeholders. While regular contract disputes are solved in court, it may be more challenging to solve these disputes between people in two different geographical locations. While the idea is very technologically advanced, there will still be issues that arise between parties; this is inevitable as it always occurs when agreements are made.
One of the biggest problems surrounding smart contracts is the cost of hiring developers who can code in a smart contract language. Another issue is the gas fee associated with creating and processing the transactions for smart contracts.
An additional issue with smart contracts is that they may be created with issues or flaws that were developed from the code the smart contract was written in. Since smart contracts are immutable – they can’t be tampered with – this could make smart contracts more time consuming and can cost additional money as a new smart contract without any flaws would have to be developed.
We hope you are just as excited as we are about NFTs and continue to stay informed at NFTexplained.info. To get the latest news in this rapidly evolving space, follow our team on Instagram & Twitter!