The smart contract was invented in 1994 by cryptographer, Nick Szabo. Szabo realized that the decentralized ledger could serve as smart contracts or self-executing contracts. In this way, contracts could be converted to computer codes and stored and replicated on the system. However, these codes are supervised by the network of computers that control the Blockchain.
Meanwhile, the implementation of self-executing contracts did not occur until 2009, when Bitcoin appeared with its Blockchain. It is interesting to note that Szabo designed a decentralized digital currency mechanism, although it was never implemented. He called it the Bit Gold. Bit Gold already had many of the features that Bitcoin showcased almost ten years later.
In simple terms, a smart contract is a programmed protocol that digitally facilitates transactions between two parties. The code and agreement found on the contract exists on a distributed Blockchain network. You can conduct business transactions with anonymous parties without a third party’s need using a smart contract.
In other words, a smart contract helps you to exchange money, property, or anything of value in a conflict-free way without a middleman. A smart contract can be seen as a vending machine. Smart contact does not only outline the rules, it enforces them. In this article, we will examine smart contracts and how they operate.
What You Need to Execute a Smart Contract
In basic terms, smart contracts are lines of code that are stored on a Blockchain. They run the exact way they have been set up to run by those who developed them.
Meanwhile, they automatically execute when predetermined conditions have been met. There are four principal components that make up the self-executing contract.
- The subject of the contract
- Digital signature
- Contract terms
- Decentralized platform
With the contact subject, you can access the goods or services governed by the smart contract. You will need the digital signature (private keys) from the participants in the contract to initiate it. Next comes the specification of the contract terms and it is where you lay down the exact sequence of operations.
These sequences of operations execute commence when the contract executes. After that, you will need a decentralized platform to store the smart contract. With a Blockchain network, you can store the smart contract in redundancy and save them for alterations.
Smart Contract Benefits
There are multiple benefits that you can drive from self-executing contracts.
Since you are the one agreeing, you do not need a broker, lawyer, or intermediary. Execution is done automatically, so it eliminates the danger of manipulation by a third-party.
Since documents are encrypted on a shared ledger, you can always see what is going on with every transaction.
- It is safe
The cryptographic nature of smart contracts means that it is highly improbable for anyone to hack into the system. Therefore, your documents and transactions are practically safe.
- Speed of transaction
It will take you a significant time and paperwork to manually process documents that a self-executing code can handle within minutes.
Since there is no intermediary or go-between in your transaction process, you will save more money.
How You Can Use Self-Executing Contracts
You can deploy smart contracts across the board from financial services to healthcare to insurance, etc. They can be used in different industries like:
- Insurance companies
In 2017, two insurance companies, Atlas Insurance in Malta and Axa in France, tested smart (self-executing) contract features. They developed prototypes that compensated airline customers.
Today, healthcare systems are using smart contracts to record and safely transfer data. A good example is the EncrypGen, which uses self-executing contracts to transfer patient data, thereby eliminating third parties securely. This approach ensures that patients control their data, and researchers will have to pay if they need it.
Governments can leverage smart contracts running on blockchain to make voting systems completely trustless and more secure. Some applications like FollowMyVote currently use self-executing contracts and blockchain technology to protect votes from fraud. Once voting is over, the smart (self-executing) contract will send a token to the address representing the winner of the vote.
- Business management
Businesses can leverage smart contracts to run payrolls instead of paying staff to carry out the same task. Your business can set up a self-executing agreement that says, “When the date is 20.10.15, the Business sends Christy 2BTC. It ensures that Christy will always be paid on time, and he will never be underpaid. It provides your business saves lots of time and money in the process.
Smart Contract Attacks
While self-executing contracts on the blockchain are gaining traction, there are potential attacks. For instance, there are currently emerging Defi attacks; exchange hacks, among others. However, all blockchain-related attacks are not smart contract attacks. Some are malicious and weak protocol attacks. Nonetheless, herein we are discussing the smart contract attacks and possible smart contract security guides.
- Reentrancy Attack
This type of attack occurs when the attacker withdraws funds from the target by repeatedly calling the target’s withdraw function. This was the case of DAO. When the contract cannot update a user’s balance before sending funds, the attacker can always call on the withdrawal function to clear the contract’s funds.
This type of attack happens when we take away a number greater than zero from zero. It results in a newly assigned integer of 2256. If the attacker’s balance experiences underflow, the balance would be updated so that all funds in the contract could be stolen.
- Cross-Function Race Condition
This attack happens when two functions are called, and they share the same state. The attacker tricks the contract into thinking that two contract states exist, but there is only one contract in reality.
Smart contracts on blockchain have great power, and with it comes great responsibility too. Although self-executing deals continue to evolve, the stakes remain high. Attackers are ever ready to pounce on poorly designed arrangements and run away with the funds. We must learn from the mistakes of our peers as well as ourselves.
Okereke has a passion for researching blockchain and cryptocurrency. He enjoys creating long form educational content to inform others on the opportunities in this space.