Several years ago, Satoshi Nakamoto developed the blockchain and Bitcoin. Nakamoto left Bitcoin in 2010; however, his project is still going strong. Nowadays, it is obvious that Bitcoin is not the only possible cryptocurrency, and that cryptocurrency is not the only possible application of blockchain.
Ethereum appeared in 2014 and quickly demonstrated that it is not just an ordinary cryptocurrency. Their platform allows users to develop their own blockchain, and currently there is a great number of Ethereum-based cryptocurrencies. Its other prominent feature is the possibility for users to run their own applications, called smart contracts. There is more information about Ethereum and the idea of smart contracts in our article.
Using smart contracts will help us to automatize the legal and financial sector, and to make it more transparent and at the same time more secure. In this article, we will explain how to use smart contracts in your everyday life, and also tell you a bit about the process of their development.
What are smart contracts?
Ethereum was the first crypto-project to demonstrate that the possibilities of the blockchain technology are not limited to their use for cryptocurrencies. Many blockchain enthusiasts said that this technology is capable of finding its application in many different spheres of our everyday life. Ethereum demonstrated how it can be done with the help of smart contracts.
A smart contract is a computer protocol designed for digital validation and enforcing the parties’ compliance with its terms and conditions. This is the main difference between digital and ordinary contracts – while the traditional ones only specify the terms of the deal and the penalties for their violation, the smart contracts make the deal impossible unless all terms and conditions are fulfilled.
This result is achieved because the terms of agreement between the two parties are written directly in the code of application. Smart contracts permit trusted transactions and agreements without the need of their approval by external enforcement. The transactions regulated by smart contracts are traceable, transparent, and irreversible.
How do smart contracts work?
There are four things that are essential to conclude a digital contract:
- the digital identification of each party with a private and public digital key
- blockchain environment where the contract will be encrypted
- the technologies that are necessary for fulfilling the contract (the cryptocurrency wallets or special software helping to connect the digital contract with the real environment)
- the conditions under which the contract is considered to be fulfilled.
The parties encrypt the necessary information to blockchain and sign the contract with their digital keys. If the contracts involve a certain sum of money, the necessary amount of digital currency is frozen and stored in blockchain. Once the partners validate the contract by activating their digital key, the deal is considered to be fulfilled – the contract comes into effect and the seller receives their money.
Standard blockchain transactions are also called “single-signature” transactions, because the transfer requires only the validation from the owner of the destination wallet. However, the blockchains network supports more complicated operations requiring signatures of multiple people for the transaction to be completed.
One of the means of making the smart contracts more secure is multi-sig technology. It implements validating the operation not by a single user but by the group of people. This is done in the following way: each participant of a multi-sig operation has a UI where they enter the credentials of the transaction they wish to confirm. The system gathers the signatures and executes the transaction. Nevertheless, the system does not have any control of funds and only people are authorized to approve or dismiss the transactions.
One of the possible applications of multi-sig technology is regulating crowdfunding campaigns like ICOs. Once the investors send their money, it does not go to the vault of the project immediately, but appears to be frozen for a certain period of time. In order for the starter to get their money, the participants of the campaign need to confirm their trust to the project by activating their digital keys.
What are the advantages and disadvantages of smart contracts?
The smart contract is a relatively new technology. However, it is currently recognized as one of the ones with the greatest potential. Many IT professionals are sure that in the very near future smart contracts will become an everyday phenomenon, and not a mysterious technology of the future. The numerous advantages of this technology give them grounds to think so:
- Autonomy – smart contract is a self-executing protocol, and there is no need for the person to participate in the process of validating the deal. They are capable of collecting money, realizing the transactions, and distributing the resources without the participation of a mediator. All these features are encrypted in the code of an application.
- Decentralization – smart contracts are not handled or controlled by one central server or legal authority.
- Security – since the terms of a smart contract are encrypted in the code of the program, the data cannot be lost or changed. Due to the decentralization, it is also impossible to steal the data from the server or the computer of the mediator.
- Speed – when concluding ordinary deals, you may need to wait weeks in order to have all the legal documents verified by law enforcement institutions. Once a smart contract is designed, all the necessary actions, including transferring of funds and verifying the transactions, will be done automatically.
Despite the aforementioned points, the smart contract technology is not perfect and has its own disadvantages:
- Uncertain legal status – blockchain technology is rather new and has not yet been explored by professionals outside the IT sphere. Modern legislation is not yet capable of regulating blockchain and smart contracts, and thus it is not in a position to guarantee these kind of deals.
- Human factor – despite the automation, the code of the applications is written by people and no one is immune from human error. The developer may commit an error in the code that will create a vulnerability and give abusers the possibility to use it for their own means.
- Making changes – once the smart contract is released, it is very difficult to make a change in its conditions or to cancel the deal. If you have changed your mind, you will probably need to pay an additional fee to the programmer for him to make changes to the code.
- Problems of implementation – it is impossible to use smart contracts without programming. In order to implement them in different spheres of life, the companies should have developers specializing in this area. Additionally, the developers will be likely to need the consultations of blockchain lawyers in the process of programming the contract. Taking into account the status of both technologies, it is likely to be a difficult and expensive process.
Like any other technology, smart contracts have their own strengths and weaknesses. However, there is no doubt that they are of great interest not just to IT specialists, as they can be used in different spheres of business.
Where smart contracts can be applied
Smart contracts have great potential for use in different spheres of life. However, their greatest potential is in the financial sector and law. Let’s see how smart contracts can be applied in some different spheres of business:
- Elections. It is a high-risk process of exchanging the information. Since the process of elections is a matter of national importance, it is essential that it must be secure enough to guarantee the transparency of the action. Blockchain technology can help secure the personal information of the participants and the results of the elections. It can be done by developing an Ethereum-based application containing the personal data of the citizen. The system can define if the person has taken part in the voting and for which candidate he voted. This information is encrypted in the blocks of the blockchain, and cannot be stolen or modified. At the end, the votes are automatically calculated and the results of elections are revealed.
- Lotteries. In the gambling industry, the developer encrypts the algorithm of the game to the code. The client buys the right to participate in the game, and selects the numbers in the lottery tickets. After that, the code automatically executes. If the player wins, the money is automatically charged from the company’s balance and transferred to his account. If he loses, the money is transferred to the company.
- Logistics. The process of delivering the goods contains lots of steps. Additionally, you need to get the confirmation from the second party that all the conditions are fulfilled before delivering the goods to the next point. All these steps take a lot of time, but can be performed almost instantly with the help of the smart contracts. Using smart contracts in logistics can shorten the chain of participants of the delivery process, minimize using the services of third-party agents, and make the delivery faster and safer. If the logistics is regulated by smart contracts, and the goods arrived damaged, the money can be automatically returned to the buyer.
These are the most common and obvious ways of using smart contracts; however, the possibilities are much wider.
The process of smart contracts development
The most famous languages for writing Ethereum smart contracts are Serpent and Solidity.
Serpent is the first language designed specifically for writing Ethereum smart contracts. It is based on Python and was developed by Vitalik Buterin while working on the Ethereum project. Nowadays Serpent is considered to be outdated and is no longer used in this area.
Step 1. Deployment of the environment
Preparation for the development of the application itself. While developing the smart contract, you will need the following software:
- Remix – online editor for writing and compiling the code.
- Myetherwallet – the environment for creating and compiling the application.
- Ganache – the program that will launch a private Ethereum-based blockchain. It will exist only on your machine and will be used for modeling and testing your application.
Step 2. Developing of the architecture of your contract
Planning the architecture is the main part in any sphere of software development. In order to develop the project of your future contract, you need to perform the following actions:
- defining the goals of your application
- defining the part of the application which will be implemented in blockchain
- splitting this part into its components – contracts that will perform the subgoals
- implementing the smart contracts that will perform the subgoals
- introducing the contract to the general blockchain network.
Step 3. Debugging and releasing
Releasing the application and testing it in the public blockchain. If the application does not work in the way it should work, then debugging is necessary.
Now you know how to use smart contracts in different spheres of business. If you think that this technology will suit your business, please contact us for a consultation. We can help you to develop Ethereum-based smart contracts on Solidity language. Any questions? We are here to help.