What is a smart contract ?

#blockchain #smartcontract #crypto

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Origin of the Smart contract

Nick Szabo, an expert in cryptography, is the creator of the concept of "smart contracts," more commonly known as "smart contracts." In 1998, he designed the first decentralized digital mechanism, "Bit gold," recognized as the precursor to "Bitcoin." However, it was never implemented due to lack of funding.

Nick Szabo defines a smart contract as a computer program inscribed in the blockchain consisting of predefined conditions designed to execute specific code when these are met.

The main goal is to simplify the contractual conditions of everyday life such as payment issues but not only. It also allows the need for a third party of trust to verify transactions between peers to be reduced.

Its specificities

Immutable : The conditions having been predefined in the contract ensure operation governed by code without human intervention being possible. Be careful, since the smart contract is written in the blockchain, it cannot be modified or deleted. This has many advantages but in the event of human error in the code, it will be irreversible. We have already witnessed stories of funds blocked on a smart contract that cannot be withdrawn due to code errors. I'll let you take a look at this article.

Integral : The smart contract being inscribed in the blockchain allows everyone to read the contract conditions, but also to see each transaction that has been made since the deployment of the smart contract (in the case of a public blockchain).

Secure : Each transaction involves digital and encrypted signatures to verify the identity of the actors.

Transparent : A smart contract is transparent, every transaction is visible to all in the case of a public blockchain. We can therefore deduce the confidentiality problems in the case where we want to store "sensitive/private" data. There are always solutions to this, of course (through protocols of the zk-SNARKs type like the Z-Cash blockchain, for example).

Transaction cost : Writing to the blockchain has a cost, we call it gas fees. When the smart contract executes a transaction, the applied gas fees will be used to compensate the actors who secure the blockchain. These fees vary depending on the activity of the blockchain but also on its architecture and the optimization of the smart contract. We have seen fees exceeding hundred of dollars on Ethereum during periods of high activity, against a few cents of dollars on Polygon. It is therefore important to keep this in mind when choosing your blockchain as it may be an issue to your project.

Some examples of use

Smart contracts have an interesting added value, we can think of many use cases such as insurance, real estate, voting systems, supply chain, etc. Here are a few examples:

Insurance : The smart contract can be used to define the terms and conditions of an insurance policy. For example, in the event of a natural disaster, the smart contract can automatically trigger the payment of insurance to policyholders affected by the disaster.

Real estate : The problem in this sector is the need for a third party of trust (the notary) to carry out the contract and payments between sellers and buyers. With a smart contract on the blockchain, we could do without this third party of trust because it guarantees the transaction. The signature of the smart contract would be equivalent to that of the notary.

Voting systems : The smart contract can be used to ensure the integrity and transparency of voting systems.

Artistic sector : The authenticity of a digital work can be verified by its smart contract as in the case of NFT (Non-Fungible Token). It is composed of certain predefined conditions that allow:

To manage the transfer of rights between its owner and its future purchaser
To verify the funds of the purchaser before buying the work
To retrieve the link to the image of the NFT. This is a vast subject that deserves an article of its own.