Smart contract

What is a smart contract?

A smart contract is a trustworthy software algorithm that records and automates contracts to monitor and verify adherence to the specified conditions. The work is performed utilizing blockchain technologies within decentralized systems. In simple terms, a smart contract is an automated system that ensures compliance with specified conditions by all participants and executes all necessary operations within a transaction. Therefore, the smart contract itself monitors whether the participant has fulfilled their part of the transaction. If not, it imposes penalties and blocks access to assets. When everything is in order, the smart contract validates the transaction. It transfers the agreed resources-money, shares, or even real estate-to the intended recipient.

The primary advantages of smart contracts include:

• Automation. You no longer have to monitor the implementation of agreements manually. Participants no longer need to establish trust or manually monitor agreements' execution. The smart contract automates all processes and entirely removes human influence.

• Security. A smart contract, once signed, cannot be altered or deleted because it operates on the blockchain-a highly tamper-resistant network.

• Transparency. Contract participants can access the data and executable processes of the smart contract at any time, as all information is publicly available.

Smart contracts owe their widespread adoption to the visionary Vitalik Buterin, the creator of cryptocurrency and the Ethereum platform. His contributions transformed Ethereum into a thriving ecosystem with numerous interconnected projects. However, the term "smart contract" actually predates its widespread adoption. It was coined by researcher Nick Szabo in 1994, and he also established the foundational principles and concepts for their implementation. Today, cryptocurrency and smart contracts are closely intertwined, but their applications extend beyond just digital currencies.

How smart contracts work

Knowing how a blockchain functions is essential to understanding how smart contracts work. A blockchain is a network consisting of a sequential chain of blocks that cannot be changed for one simple reason: each block carries information from the previous block. Suppose a user modifies one of the pieces of information. In that case, the others no longer align with it, and the system promptly detects the error. However, it is technically impossible to forge all the blocks; you would need to rewrite and destroy the entire blockchain to achieve this. Having noticed an error (or hack) in one of the blocks, the system will promptly prevent it and revert the block to its original state. This principle aligns with how smart contracts operate.

In contrast to traditional contracts, which often involve third-party intermediaries, smart contracts operate entirely through program code and algorithms. As a result, external intervention is unnecessary.

Here is the step-by-step process of how smart contracts work:

• Identification of parties. Every party involved in the contract must verify their identity by submitting the required personal data to the blockchain to complete the contract. The smart contract validates the authenticity and relevance of the provided data and then records and stores it.

• Defining the conditions. All parties articulate their obligations and specify pricing, terms, rights, and responsibilities. The smart contract then monitors the execution of these provisions.

• Signing a contract. All parties digitally sign the contract and provide consent for data processing. Once this occurs, the smart contract becomes active; the smart contract assumes responsibility for all obligations, including managing the transfer of the transaction's object, timing, and other relevant aspects.

Smart contracts today can be integrated into almost any system. However, many prerequisites exist for their functions to be effectively implemented in this system. Therefore, the system must provide the smart contract with:

• User tools (for example, user accounts).

• Reliable and decentralized sources of information.

• Databases for performing operations. When we refer to "operations" within a smart contract, we encompass financial transactions and any other actions the contract must execute within the system.

• The ability to use encryption and keys (private or public).

• Turing the system's completeness, i.e., the system's proven computational function without logical errors.

However, so-called Oracle programs can help broadcast information for a smart contract from external sources and convert it into an appropriate format.

Important! The legal regulation of smart contracts depends on the specific country. Still, most legislation takes a very "cautious" approach to them due to the lack of uniformity in the interpretation and procedure of a smart contract. Therefore, in some countries, a smart contract is considered software, and each software has a copyright holder. Hence, if questions arise, they must be addressed directly with the copyright holder, who is responsible for any cases or violations.

Types of smart contracts

Initially, smart contracts were needed only to track all the circumstances step by step and conclude whether they were fulfilled or not. However, smart contracts are also developing along with blockchain, so today, they have several subtypes and areas divided into functions or other principles. For example:

• Centralized or decentralized.

• Confidential, partially confidential, or completely open (talking about anonymity;)

• Automated (the entire smart contract functions completely independently) or manual (the user must still confirm transactions at each step).

Therefore, smart contracts can be combined; the smart contract developer can change any of these characteristics (decentralized, confidential, and automated, for example) at his own discretion.

Examples of smart contracts

Most often, smart contracts are used today in the following areas:

Financial sphere. In particular, we are talking about DFA, i.e. digital financial assets. With their help, you can simplify and speed up operations such as transfers, issuing loans, insurance, and selling securities. For example, they can regulate and monitor the situations when a person is entitled to payments and reduce the risks of trading on the exchange to minimize the occurrence of fraud or errors.

Real estate industry. Smart contracts allow you to automate buying or selling housing or renting. For example, you can specify the transaction amount, the timing of its transfer, the departure of previous residents from the house, and the transfer of ownership rights. Therefore, thanks to the blockchain, there is no longer any need to contact the authorities to change the property owner: the smart contract rewrites the owner automatically as soon as all conditions are met and transmits the data to all systems.

Supply chain. For example, a smart contract and blockchain can solve the problem of low-quality goods or counterfeits since the product's expiration date, identification number, serial number, etc., can be indicated in the smart contract. Therefore, the smart contract will monitor whether the supplier delivered genuine products and whether delivery and quality standards are met.

In cryptocurrency, smart contracts can be used not only to perform certain functions but also to safely store and record information, for example, about the owner of cryptocurrency assets. Hence, the Tether (USDT) token smart contract stores information about token holders, including their number, the address where they are located, etc. The smart contract also implements transfers and withdrawals of these tokens from the account. The same goes for NFTs: smart contracts record ownership and their transfer if it occurs.

Smart contracts can also be used for other purposes. Here are some illustrative examples of what a smart contract looks like in practice in everyday life:

• You and your company place bets on who will win the next football match and write down the bet amounts, your account details, and the values ​​at which transfers are made in one direction or another in the smart contract. As soon as the match ends, the blockchain contract checks its outcome automatically on one of the verified sites and triggers a mechanism for transferring funds depending on who won.

• You order goods online for a large amount, which is recorded in the blockchain. When the courier delivers the goods, you check them and confirm everything is in order. The smart contract automatically transfers the amount frozen in your account to the store.

• You rent an apartment with the condition that payment must be made to your account from the 10th to the 15th of each month. Suppose the tenants do not transfer the agreed amount to you during this period. In that case, the smart contract will block the doors to the apartment via the smart home and invalidate the rental agreement.

• You can make a will using a smart contract. Once the system receives the death certificate of the person who signed the will, it implements the necessary transfer of rights and resources to the specified persons without the participation of intermediaries and the need to receive, draw up, and fill out paper documents.

What are smart contracts written on?

Smart contracts operate based on code, just like any other program. In this case, the coding language may be different. So, a smart contract can be written in:

Solidity (Ethereum)

This language was invented by Christian Reitweisner, Yoichi Hirai, and Gavin Wood, who worked on the Ethereum system. Today, it is considered the most popular platform for creating smart contracts. This allows you to integrate them into other blockchains but still run on the Ethereum network. Therefore, the Solidity language was the first language in which smart contracts were created. It remains highly accessible due to its large community and ongoing support.

Solidity offers several advantages. First, it allows you to compute all functions without restrictions. Unlike Python, C++, and JavaScript, it has no steep learning curve. Another advantage of Solidity is its support for hash tables, which makes data display doubly convenient.

C++ (EOS)

It is a universal programming language for all purposes, allowing applications to scale and run more seamlessly. The language community comprises over 4 million developers. At the same time, this language is often perceived as more challenging to code than the previous one. It is the preferred choice when creating smart contracts on the EOS blockchain.

JavaScript

The most famous programming language, known since the era of Web 1.0 of the Internet, appeared in traditional programs with applications but has also found its place in blockchain systems. Since JavaScript is considered an entry-level language, today, you can find several ready-made JavaScript templates and libraries online that can be customized to your needs and immediately connected to any ecosystem. Because of this, most projects (particularly startups) are initially developed based on Java.

Yul

It is an intermediate programming language that compiles into bytecode and executes queries on server systems. Therefore, The Solidity compiler employs Yul as an intermediate language that can function independently. It is highly suitable for extensive optimization and ensures readability regardless of whether the compiler generates the code. Yul is also highly regarded and is ideal for beginners.

How to create a smart contract

Smart contract development occurs in several stages.

1. Analysing the goals and objectives of the smart contract.

Begin by understanding the purpose of the smart contract, as its algorithm depends on this. Building a sequence of checks that the smart contract will perform is vital. This step is crucial and should never be rushed or oversimplified. Doing so could escalate risks during interaction and result in losses for both parties. Defining the contract terms, implementation methods, and any other necessary parameters is essential during this stage.

2. Choosing the right blockchain

Selecting a blockchain depends on the parameters you defined in the previous step and your familiarity with programming languages. Most smart contracts are created on the Ethereum blockchain since it's tailored for scaling and seamless integration with various projects, secondary systems, or virtual machines. Therefore, you'll find Ethereum suitable in at least 8 out of 10 cases.

3. Code development and creating a smart contract

After choosing a blockchain, you can move on to writing code directly. To achieve this, use one of the programming languages mentioned above or any other, depending on your ability and platform functions.

4. Testing and debugging

Once the code is written, it's essential to thoroughly check for errors, debug any issues, test the algorithm, and verify that it functions correctly. For this purpose, special tools and virtual environments are used to test and analyze the smart contract at all scenario stages.

5. Deploying a smart contract

Once the test successfully passes, the smart contract is ready for deployment, which means it can be transferred to the chosen blockchain platform and put into use. The smart contract address is then registered. Once this step is complete, any participants in the blockchain network can connect to the smart contract and utilize it according to their requirements.

What is a smart contract audit?

A smart contract audit is a smart contract verification for obvious software (code) errors, weaknesses, and algorithm deficiencies. Usually, an audit is conducted before deploying a smart contract on the blockchain or when choosing between different smart contracts for a transaction. The goal is to select the most optimal contract from the available options.

Therefore, audits can serve one of three purposes:

• Assessing the smart contract for security. In such an audit, examine the cryptographic methods employed in the contract and assess user authentication mechanisms. Identifying and analyzing any weaknesses that could compromise data confidentiality, integrity, or the transparency of the contract. As a result of this audit, the contract's security is enhanced.

• Reviewing the smart contract code. This audit is a formal code quality assessment and does not impact the project's logic or requirements. The primary goal is to optimize the code, enhance its readability, and make it more accessible for understanding and implementation. This audit is conducted early in the contract development process or at various stages, including the final phase. It aims to enhance the final code, mitigate risks, and promptly identify system vulnerabilities.

• Conducting an audit of economic models. This audit analyses the contract's financial aspects, including value distribution, resource allocation, economic stability, and fairness within the structure. In this type of audit, simulation modeling is commonly employed. The smart contract undergoes testing, and its performance is evaluated in practice. Following the audit, a report is generated, providing recommendations to enhance economic stability and improve the model's efficiency.

Regardless of the type of audit, it always consists of the following stages:

1. Audit specialists (usually several) conduct an initial analysis of smart contracts.
2. The analysis results provide recommendations to the project for implementing necessary corrective or optimization measures.
3. The project team implements changes based on the identified deficiencies or issues in the system.
4. The audit is repeated, considering new changes (and errors, if any remain).

Therefore, an audit is considered a standard procedure before using a smart contract to invest in and launch DeFi, especially if the process involves large companies and large-scale projects involving substantial resources and significant risk.

Conclusion

Smart contracts are a new generation of contracts, the importance of which is almost impossible to overestimate because they enable you to establish agreements and contracts with minimal risk, all without the need for intermediaries-even your own involvement. In the future, smart contracts have the potential to simplify bureaucratic mechanisms and structures significantly. They enable seamless transactions, whether transferring rights or money, completely automatic, transparent, and independent. They alleviate the burden on relevant organizations and accelerate business processes, transfers, and transactions. Today, Smart contracts are no longer limited to the cryptocurrency world and metaverses; they are now making their way into the traditional economy and various aspects of human life. Now, there's no longer any need to handle interactions between parties manually, verify conditions, track deadlines, or fret about security guarantees. Smart contracts handle all these tasks; the best part is that they do it without additional cost.