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Smart contracts: fundamentals

Smart contracts: fundamentals

About Us / 2019-11-08 10:55 AM

In 1994, Nick Szabo, expert of law and cryptography, came up to the idea to draw up contracts with the help of the decentralized ledger. The contracts are digital and self-executing.  They are written in a form of a code, saved and duplicated in the system, and their implementation is provided by the network of nodes.  

What are the integral components of a smart contract?

The smart contract is being recorded in the blockchain. The blocks unite all the messages connecting to a certain smart contract. The messages trigger certain actions besides the blockchain in the real or digital world.

Mandatory attributes of smart contracts:

  • the use of electronic signature on the basis of public and private keys that are obtained by two or more parties to the agreement;
  • private decentralized environment (Ethereum for example);
  • the very object of the contract and the instruments necessary for its implementation (cryptocurrency settlement accounts, Oracle programs, etc.);
  • described in details implementation conditions that are approved by the signatures of the parties to the agreement.

What are the advantages of smart contracts in comparison to the traditional agreements?

The smart contracts advocates are convinced that many types of contractual relationship should be completely or partially self-executing. The cryptography underlying smart contracts provides a higher level of security. Smart contracts can decrease transaction costs as well as prevent risks of ambiguous interpretations of the conditions or unfair judicial decisions. So, we can distinguish the following points among the most considerable advantages of smart contracts:

  • autonomy (no need for a broker, a bank or a notary to make a deal);
  • reliability and security (the contract that is multiply copied and is saved in an encrypted form in the blockchain);
  • system security is guaranteed by mathematical laws and decreases the possibility of hacking as well as retrospective replacement of  information);
  • economy and speed (all the processes are automated);
  • accuracy (thanks to the automation and minimization of manual labor the probability of errors goes down)

Does the smart contract have drawbacks?

  • Smart contracts are now far from being perfect: the blockchain infrastructure is not enough developed and the very code often contains critical errors. Besides, the legal framework doesn’t well know what to do with smart contracts. Oracle programs are not developed enough as well. All the staff creates certain obstacles on the way of integration of the smart contracts into the everyday activity of the organizations and separate people.
  • In a number of cases, the smart contracts are more flexible in comparison to the traditional agreements. The information recorded in the blockchain cannot be amended that is why it is extremely important to meet the requirements of accuracy and credibility of the source information as well as not to make mistakes while inputting the data.
  • Besides, it is not suitable for the banks and large corporations to exchange confidential data through the openly distributed ledgers. The problems of scalability and speed of transaction processing remain urgent as well.
  • Many developers try to solve all these issues in frames of different platforms. The progress is going on and most of the problems will be solved in the future, and the economic agents will completely pass from drawing up traditional contracts to their digital implementation and even to their performance with the help of the artificial intelligence.