Experts call smart contracts one of the most promising functions of the blockchain technology. They could help exchange information, enter into agreements and make transactions much faster and cheaper than any of the current options.
Thanks to Ethereum, smart contracts have become a reality. In simple terms, they allow two or more parties to sign a digital contract for electronic money purposes without any intermediaries if all pre-specified criteria are met.
A simple example of a smart contract would be paying your child weekly pocket money with the payment trigger set on, let’s say, Mondays. In this case, your child will be automatically receiving the amount you agreed on in cryptocurrency every Monday.
So why are smart contracts so useful and what is the reason behind such close attention from venture capitals?
In 1996, a famous American programmer and cryptographer Nick Sabo formulated the smart contracts operation principle-computer protocols for deal-making.
CONTRACT IS CONDITIONS CREATED FOR THE EXCHANGE OF ASSETS BETWEEN TRANSACTION PARTICIPANTS. IF PARTIES FULFILL THEIR OBLIGATIONS, THE SYSTEM AUTOMATICALLY MAKES THE EXCHANGE. IF NOT, EVERYONE REMAINS WITH WHAT THEY HAD. EVERYTHING HAPPENS THROUGH MATHEMATICAL ALGORITHMS. THEREFORE DECEPTION IS IMPOSSIBLE.
Sabo’s concept was almost a ready-made description of the technology that conquered the world ten years later under the name of smart contracts. But back in 1996, getting this message across was close to impossible as there were no tools to do that.
Smart contracts were developed with the advent of a still popular Ethereum platform. Though, the time has shown Ethereum has several significant limitations. These include a relatively low transaction processing speed, high commissions, high transaction confirmation costs, and more.
Smart Contract Features
Against the background of the usual deal-making methods, smart contracts stand out due to some advantages:
As opposed to traditional transactions where both parties turn to an intermediary, smart contracts completely exclude third-party intervention. Data encryption ensures the anonymity of the process
Manual document processing takes a long time, therefore, increasing the time needed to complete a task. Smart contracts automate the process and save this precious asset.
Smart contracts can save a considerable amount of funds on the absence of costs for intermediaries, reduction of transaction costs, and by offering both parties more favorable terms of cooperation. Contracts do not require expenses for the documents confirming the terms of the transaction.
Despite the perks described above, these contracts have several disadvantages: implementation complexity in real business processes, the lack of specialists and sector regulation, and, oddly enough, the inability to change the contract.
If after the contract is made parties agree on more favorable conditions or new circumstances arise, this contract cannot be edited. This restriction can play an evil, costly joke on all parties in case of any code errors or unfavorable contract conditions. Last August, REX ICO project lost $ 1.3 million due to such code error. Because it was created on the smart contract basis, Parity wallet became vulnerable allowing hackers to steal around $ 30 million.
However, all these difficulties do not frighten venture investors who have already seen the true worth of the technology. Current blockchain community is actively working on resolving all issues simultaneously investing in new promising projects.
Smart contracts are not 100% immune to error as it’s still an experimental technology. Though, its bright future is undeniable. Smart contracts can significantly save human resources, time, and money by allowing you to maintain confidentiality, automate processes, and eliminate the human factor. Said advantages will only make the demand for them grow.