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Smart Contracts: types and application

Smart contracts are an important component of blockchain, making it even more secure, reliable and transparent. Using smart contracts, users can make secure financial transactions without intermediaries. 


In addition to cryptocurrencies, smart contracts technology can be successfully used in the fields of logistics, medicine, management, etc. This is what makes smart contracts technology increasingly common and popular in the world. According to Market Research Future, the global smart contracts market will reach $300 million by the end of 2023. 


In this article, we will detail what  a smart contract is, as well as their types and development process. 


Definition and history of smart contracts


The term “smart contracts'' was introduced by computer scientist Nick Szabo in 1994, when he developed the latest as self-executing digital codes. In  the concept of smart contracts describing, Nick Szabo wrote that they are more functional than their paper counterparts. Nick Szabo compared their operation to that of vending machines, which have programmed logic. 


  1. The user selects a product.
  2. The vending machine shows how much money to deposit in order to get the product.
  3. The user deposits the necessary amount.
  4. The vending machine checks whether the amount is correct.
  5. The vending machine dispenses the selected product.


The vending machine dispenses the selected product only after all requirements are met. If the user doesn't select a product or pays the wrong amount, the vending machine won't dispense the product.

 

What is a smart contract in blockchain


If you study the smart specification, one can say that it is software code with prescribed conditions, which is stored in a blockchain and uses an algorithm to track the fulfillment of the conditions by the two parties. Because the information about the terms is stored in a blockchain, the contract cannot be changed or tampered with unnoticed by other parties. 


Smart contracts differ from the usual paper contracts by following characteristic features. 


  1. Distributivity. Smart contracts are replicated and distributed across all nodes in the network. 
  2. Determinism. Have a clear algorithm of actions and predictable results. 
  3. Autonomy. After the initiation of a transaction, conditions are fulfilled automatically without intermediaries.
  4. Invariability. After creation, it is impossible to make changes in the smart contract. 
  5. Customization. When creating a smart contract, developers can prescribe any computing algorithm. 
  6. Trustworthiness. Contract participants trust the protocol, and all data is stored in the blockchain. 
  7. Transparency. The source code of smart contracts is generally open and can be accessed by anyone.



In addition to cryptocurrencies, smart contracts can be used in many other areas. For example, in logistics, retail, international trade, real estate, elections, as well as finance, taxation, and e-commerce. In fact, smart contracts can be used wherever fair and automated regulation is needed. 


How do smart contracts work


A smart contract in blockchain is software code that triggers certain actions (functions, operations, transactions, algorithms) when pre-specified conditions are met. The conditions are “if ▶️ then”. 


For example, if user A transfers 3 BTC to user B's account, then user 2 will send him 44 ETH. When the conditions are met, the smart contract will confirm and execute the transaction. 


Smart contracts cannot interact with the real world. Therefore, for a smart contract to work correctly, it must contain the following elements. 


  • Participants. These can be individuals or companies that have a unique digital signature.
  • Subject of the contract. The services, goods, data or cryptocurrency to be exchanged. 
  • The conditions to be met by the participants.
  • Oracles. Programs that help smart contracts get information from the outside world. 
  • A platform for smart contracts, in which the software code is spelled out. 



Schematically, the work of smart contracts can be depicted as follows. 


  1. The user initiates a transaction.
  2. Information about the transaction enters the blockchain network.
  3. The blockchain nodes confirm the initiator's status information and the transaction.
  4. The confirmed transaction is combined with other transactions to form a new block. 
  5. The new block is added to the blockchain.
  6. The transaction is completed.


What are the three types of smart contracts


Let's take a closer look at what types of smart contracts there are and what tasks they are suitable for. 


Smart Legal Contracts


The most common type of smart contracts, which are based on a legal agreement with legal requirements. If set up correctly, such a contract will be legally enforceable and require the parties to meet their obligations. Failure to meet obligations can result in an automatically initiated lawsuit. 


Smart Legal Contracts can be designed for cryptocurrency transactions as well as real estate registration or other applications. Most such smart contracts underlie cryptocurrency exchanges, DeFi projects, NFT marketplaces, and GameFi-projects. 


DAO (Decentralized Autonomous Organization)


Decentralized Autonomous Organizations work like traditional organizations but in blockchain and under control of smart contracts. That is, all the rules of the organization and the rights of the participants are encoded with smart contracts which cannot be changed or tampered with unnoticed by other participants and without their agreement. 


Examples of DAO smart contracts are Decentreland, Uniswap, Polkadot, MarketDAO. These projects are managed by smart contract token holders. They can make various proposals for changes to the project, such as changing the blockchain code, determining the structure of commissions, and voting on these changes. 


Application Logic Contracts (ALC)


Smart contracts of this type run under a control program and allow that program to interact with the blockchain. For example, ALCs enable users to use NFT tokens in games or are responsible for linking the blockchain to oracle programs. 



Benefits of Smart Contracts 


The smart-contract technology has great prospects for development, and it is possible that soon it will replace the traditional paper-based counterparts. Let's consider in detail their advantages.


  • Security and reliability. All information is stored in the blockchain in encrypted form. It cannot be faked or deleted. 
  • Independence. Smart contracts verify that conditions are met, eliminating dependence on intermediaries.
  • Transparency. Information about the contract can be accessed by any user of the blockchain network. In addition, participants can also verify changes to the smart contract.
  • No errors due to human components.  By using software code, smart contracts are less prone to error due to human factors. 
  • Speed. Processes are automated and happen instantaneously. Also, smart contracts eliminate the need to manually fill out paperwork. 
  • Savings. There are no transaction costs and no middlemen, except for the gas fee.
  • Immutability. It is impossible to make changes to a smart contract that has already been created. 


Smart contracts creating and developing process


To create a smart contract, you can use the services of professional programmers, or you can try to do it yourself. But it is important to understand that independent contract programming requires high skills and knowledge of development.


Contract development stages 


Choosing a blockchain platform 


The most well-known platforms are Ethereum, Binance Smart Chain, Solana, TRON, Avalanche, Lisk, Cardano, Hyperledger Fabric, Nem, Stellar, NEO, Ontology. Smart contract platforms usually have ready-made templates. That is, you don't have to write the entire program code. It will be enough to enter the parameters of the transaction in the designated fields and confirm its execution.


Choosing of tools for development 


The most significant tool is the programming language. The main programming languages for developing smart contracts are Solidity, C++, Go, Rust, Javascript, C, Vyper, DAML. 


In addition to the programming language, you can also define the following parameters for yourself:


  • An integrated development environment that helps you write and test code, such as Remix, SettleMint, EthFiddle, Visual Studio Code, Atom. 
  • Frameworks that are used to test and deploy smart contracts, e.g. Hardhat, Truffle, Brownie, DappTools, ApeWorX.
  • Test networks that are needed to test the performance of a contract in a high load environment, e.g., Rinkeby, Goerli, Kovan, Hyperledger, Umbra, Ropsten. 
  • Cryptocurrency wallets that enable you to test the protocol, e.g. MetaMask, TrustWallet, Coinbase, Binance. 


Developing and writing code


You can write code to create a smart contract from scratch or use a ready-made platform template, or an open-source library. 


Testing a smart contract


Before using the written code, it is important to test it to detect different bugs and hidden vulnerabilities. This is one of the most significant steps, because smart contracts are open source, so any hacker can study them, find the vulnerabilities and use them for hacking. 


We also remember that smart contracts are immutable. That is, once deployed, it will be impossible to change it. So testing is the last chance to fix all the bugs and bugs in order to deploy a quality and reliable smart contract. 


Deployment of a smart contract


At this stage, the smart contract becomes available to the users and cannot be changed. If a vulnerability is spotted after some time, the only way out is to update the smart contract version. That is, you have to update the smart contract and run the new version of the smart contract. The old version will not go anywhere and will remain in the blockchain. 



Smart contract: technology of great promise 


Despite the fact that smart contracts technology has existed for quite a long time, its active development phase has lasted for the last few years, and already now we can talk about the great prospects of smart contracts. The use of this technology helps to conduct safe, reliable, fast and transparent transactions without intermediaries and with minimal risk of errors. 


Developing a smart contract is a fairly complex process that requires a lot of work and attention to various technical details. You can figure it out on your own or you can trust the RVA team to think of everything for you. 


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