Smart Contract

Abstract

Smart contracts are an integral part of blockchain technology that automates business operations by removing intermediaries. Leading organizations such as real estate, finance, banking, and health care have adopted it due to its intrin- sic features: transparency, integrity, privacy, efficiency, and confidentiality. There are various platforms available supported by high-level programming languages to implement and deploy smart contracts.

Researchers are molding modern technologies like Artificial Intelligence (AI) into smart contracts to make them more effective and reliable. However, a few vulnerabilities or risks need to be taken care of while imple- menting smart contracts.

What is Smart Contract

A smart contract is an automated digital contract instead of a paper contract that shows a mutual agreement between buyer and seller. The smart contract code and the contained agreement are shared across a distributed, decentralized blockchain network. Smart contracts are executed on the blockchain network, which removes the need for a third party for application-specific transactions. There are many implementation and deployment platforms available where one can create his own smart contract and execute it on the blockchain network.

History and evolution of Smart Contracts

Nick Szabo, cryptographer, presented the real use case of a decentralized ledger for the smart contract in 1994. He outlined that we can digitally write the contracts, which can be kept in blockchain-based network systems. These smart contracts can improve transparency and build trust among communicating parties.

In 1994, an American scientist and cryptographer, Nick Szabo, devised the term smart contract for the first time. He defined the term as follows: “A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises”.

The smart contract is the piece of code that is used to achieve a common consensus among multi-parties. The smart contract is the digital contract that lays down all the protocols, terms, and conditions to reach a common consensus among the untrusted parties. It eliminates the intervention of the third party.

Traditionally, the contracts were framed as detailed legal documents and processed with the help of lawyers and consultants. Such systems were so-called centralized systems. With the advent of blockchain technology, smart contracts started deploy- ing on the blockchain’s decentralized network.

Ethereum was proposed by Vitalik Buterin in late 2013 and made live on July 30, 2015. It has now become one of the common platforms for smart contract implementation. The traditional sys- tem requires the intervention of the chain of middlemen like lawyers and higher authorities of the law. The smart contract just requires the blockchain network for its deployment. Smart contracts have been strengthened over time.

The evolution of smart contracts with its detailed description is described as follows:

• Smart Contract 1.0—Bitcoin script Initially, the smart contracts were written in the form of scripts like pseudo-code that was stack-based with no looping state- ments. But due to the language limitations, the development and the progress of smart contracts were limited. It has many limitations as a lack of looping state- ments made the programming power.

• Smart Contract 2.0—Ethereum smart contract virtual machine With the evo- lution of Ethereum, much progress was seen in the designing of smart contracts. Along with Ethereum, the Ethereum virtual machine (EVM) played an integral role in the successful deployment of the smart contracts in the network. It ensures the integrity of the contract along with the easy execution of the contract.

• Smart Contract 3.0—This generation of smart contracts allowed users to solve real-life problems through blockchain technology. This happened due to the inven- tion of Cypherium. It is the only decentralized technology that meets the real-world requirements and has its own Cypherium virtual machine that is JAVA-based and allows us to perform hierarchical calculations, supports run time and compile time security check, supports transparent billing mechanism, and also has enhanced security features.

Need for the Smart Contracts

The conventional way to make a contract is to agree on a deal, go to a third party like a bank or lawyer as per the requirement, and make a contract. The issue with this mechanism is that it is time-consuming, includes paperwork, and is not much trustworthy. With the help of smart contracts, one can exchange money, shares, property, etc., without any third party in a transparent way.

The concept of making contracts between multi-parties for making any agreement has been evolved through ages. Traditional methods follow contracts as a form of a legal written document. For the deployment of such contracts, we require agents called the lawyer and a centralized system for verification. The advent of blockchain technology eliminates the requirement of centralized governing systems and makes the system decentralized. As a result, we can remove the bottlenecks of the traditional centralized system to deploy contracts by implementing a digital smart contract.

The benefits of smart contracts are described as follows:

1. Transparency: It is a crucial and fundamental characteristic of the smart con- tract. Before agreeing on any transaction, both parties need to check the terms and conditions mentioned in the smart contract. So, it eliminates the chances of clashes.

2. Time-efficient: Conventionally, the contract takes a lot of time due to the doc- umentation, intermediary, and other unnecessary steps. Smart contracts remove the need for third parties and eliminate the delay caused due to manual proce- dures. One needs to work with an online transaction and all other work proce- dures will be executed automatically.

3. Precision: Manual works are prone to errors, whereas smart contracts are soft- ware codes, that will execute automatically upon initiating a request for a finanance cial transaction. Before deploying a smart contract into the blockchain network, proper testing must be performed to ensure high precision results.

4. Savings: Smart contracts save money as it eliminates the roles of the third party, lawyers, intermediaries, witnesses, and papers for the documentation. So, the cost associated with these roles is eliminated in smart contracts.

5. Trust: As smart contracts have features like transparency and security, they are more trustworthy than conventional contracts.

6. Decreases Human Intervention: Traditionally, contracts were written on a legal document, which was long enough, complicated, and arduous that required trained personnel for framing and interpreting them. The smart contract is just a piece of code that, once deployed successfully, decreases human intervention and decreases complexity. We now no more require the chains of a middleman like lawyers and consultants.

7. Decentralized: Smart contracts are deployed on a highly decentralized blockchain network. Hence, it removes the bottleneck of a single point of failure of centralized system.

8. Storage and backup: Blockchain technology provides the benefits of storing the records in a public ledger. Once the record is entered into the chain, it will last forever. This property of blockchain technology gives benefits for storing smart contracts on the chain eternally.

9. Accuracy: The terms and conditions of the contract need to be expressed pre- cisely without any ambiguity. The smart contract provides the benefit of record- ing all the legal details accurately.

10. Security: The blockchain technology guarantees smart contracts to be tamper proof. Hence, it achieves the highest level of security as it reduces the chances of arising dispute.

11. Speed and Efficiency: Traditionally, the contracts were written in a legal doc- ument that required processing manually, which consumed more time. But the smart contract is a piece of code that runs on the network and is self-executable; hence it takes less time. The smart contract is more efficient as it is not processed manually, reducing human errors.

12. Clear Communication: As the smart contract is accessible to all, the terms and conditions are cleared prior; hence, there are no chances of ambiguity. This reduces the chances of miscommunication and misinterpretations.

Comparative analysis of Traditional Contract and Smart Contract

Parameter	Traditional contract	Smart contract
Time required	1–3 days	Minutes
Payment scenario	Manual remittance	Automatic remittance
Cost	Expensive	Not expensive
Signature mode	Physical	Digital
Escrow	Required	Not required
Layers requirement	Compulsory	Not compulsory
Reconcilation process	Slow	Fast
Trusted third party	Necessary	Not required
Dispute resolution via	Judges, arbitrators	Consensus mechanism
Specification	Natural language	Smart code
Archiving	Hard	Easy
Transparency	Available	Not available
Security	Limited	High level security

Application of Smart Contract

Smart contracts have a wide range of applications across various industries due to their ability to automate, secure, and decentralize processes. Here are some prominent applications:

1. Decentralized Finance (DeFi)

• Lending and Borrowing: Platforms like Aave and Compound allow users to lend and borrow cryptocurrencies without intermediaries.

• Decentralized Exchanges (DEXs): Uniswap and SushiSwap enable peer-to-peer trading of tokens without a centralized authority.

• Stablecoins: Smart contracts underpin stablecoins like DAI, which are pegged to real-world assets to maintain value stability.

2. Supply Chain Management

• Tracking and Transparency: Smart contracts ensure transparency and traceability of goods, verifying the authenticity and movement of products (e.g., VeChain).

• Automated Payments: Payments can be automatically released upon the fulfillment of predefined conditions, reducing delays and fraud.

3. Digital Identity and Credentials

• Identity Verification: Platforms like uPort and Civic use smart contracts to manage digital identities securely and verify credentials without central authorities.

• Credential Verification: Systems like EncryptID (your project) allow for decentralized verification of educational and professional credentials.

4. Gaming and NFTs

• Non-Fungible Tokens (NFTs): Smart contracts enable the creation and trading of NFTs, representing ownership of digital or physical assets (e.g., CryptoKitties, NBA Top Shot).

• In-Game Assets: Games like Axie Infinity use smart contracts to manage in-game assets, allowing players to own, trade, and earn from their assets.

5. Real Estate

• Property Transactions: Smart contracts can automate real estate transactions, ensuring funds are released only when ownership is transferred.

• Fractional Ownership: Platforms like RealT enable fractional ownership of real estate, allowing investors to buy and sell shares in properties.

6. Insurance

• Automated Claims Processing: Smart contracts can automatically process insurance claims based on predefined conditions, reducing fraud and processing time.

• Parametric Insurance: Payouts can be triggered automatically by specific events (e.g., weather conditions), as seen with Etherisc.

7. Voting and Governance

• Decentralized Voting: Smart contracts ensure transparency and immutability in voting systems, preventing fraud and manipulation (e.g., DAO governance).

• Governance Tokens: Token holders can vote on proposals and changes within decentralized organizations (e.g., MakerDAO).

8. Healthcare

• Patient Data Management: Smart contracts ensure secure and interoperable management of patient data, allowing only authorized access.

• Supply Chain for Pharmaceuticals: Ensuring the authenticity and traceability of drugs through the supply chain.

9. Intellectual Property

• Royalty Distribution: Smart contracts can automate the distribution of royalties to creators based on predefined terms.

• Licensing: Managing and enforcing licensing agreements for digital content and software.

10. Automated Legal Agreements

• Escrow Services: Funds can be held in escrow and released upon fulfillment of contract conditions without intermediaries.

• Wills and Inheritance: Smart contracts can automate the distribution of assets based on the terms of a will.

11. Energy Management

• Peer-to-Peer Energy Trading: Platforms like Power Ledger enable direct energy trading between consumers using smart contracts.

• Automated Billing: Smart contracts can automate energy billing and payments based on usage.

12. Internet of Things (IoT)

• Device Autonomy: Smart contracts can enable autonomous operations and interactions between IoT devices.

• Data Sharing: Securing and automating the sharing of IoT data between devices and stakeholders.

13. Crowdfunding

• Initial Coin Offerings (ICOs) and Token Sales: Smart contracts manage the issuance and distribution of tokens in exchange for contributions.

• Decentralized Fundraising: Platforms like Kickstarter and Patreon can be decentralized using smart contracts, ensuring transparency and trust.

14. Microfinance

• Microloans: Smart contracts can facilitate microloans with automated repayment terms and interest calculations.

• Community Lending: Enabling community-based lending and borrowing without intermediaries.

Smart contracts have transformative potential across numerous sectors by automating processes, reducing reliance on intermediaries, and enhancing transparency and security. As the technology matures, the range and sophistication of applications are likely to expand further.