The hype around Bitcoin, blockchain, and the related concepts does not cease. Which is why we want to talk about the so-called smart contracts and their applicability.
Smart contracts are a subset of the blockchain technology — the foundation for many interesting ideas, not only Bitcoin. In order to better explain what is smart contract and how it works, we need to elaborate on the core idea of blockchain.
Blockchain is at the foundation of smart contract
Blockchain started to become popular with the advent of Bitcoin. But blockchain is just a piece of technology behind Bitcoin, on par with cryptography, timestamp server, proof-of-work, and some others. Satoshi Nakamoto, the inventor of Bitcoin, managed to combine all the technologies invented before him in a way, the cryptocurrencies started to get traction. As the name suggests, a blockchain is a sequence of informational blocks.
Each block has a unique message OF ANY LENGTH, which is turned into a hash OF A CERTAIN LENGTH with the help of a hash function. When your input has infinite possible combinations and your output is finite, you are bound to have collisions, when two totally different messages deliver the same output. Luckily, these incidents are very rare, but you should remember about that nonetheless.
Hash output acts unpredictably, so there is no way a human can predict how the entered text will affect the hash. Take a look at how simple capitalization can change the hash:
Input: This is a great tutorial.
Input: this is a great tutorial.
When you are registered on a blockchain, you have an account, which serves as your wallet. Now, the problem with the digital assets is that they can be easily copy-pasted — you can’t double the same $100 banknote and pay at the cashier desk twice, but you can duplicate your text-file, containing your budget info. Hashing, alongside some other cryptographic mechanisms, are meant to prevent that.
The information about wallets, transactions, or participants is stored on each computer, connected to a blockchain. In other words, 100 participants contain 100 synchronized databases. There is no dedicated server, so all the participants interact with each other — hence, it is called a distributed ledger. When somebody goes rogue and tries to rewrite the information, stored on one’s computer, the other participants will detect it and discard the new info as unreliable, thanks to the inevitable hash collisions. The rogue will be forced either to play by the rules, or fork the system and start their own blockchain with blackjack and hookers — that’s how Bitcoin got split the first time.
About smart contracts
So far we have attributed blockchain to cryptocurrencies, particularly to Bitcoin. However, blockchain core principles can go beyond money and include some kind of agreement, shared between all the participants. This way, no party is able to rewrite the contract provisions, not without forcing at least 51% of participants to do the same.
The contract can include some provisions, which, once fulfilled, unlock the payment. One of the most famous blockchains, specializing in smart contracts, is Ethereum. This blockchain relies on Solidity as the main programming language. Ethereum also has Viper, which is focused more on security and stability. Three key features of smart contracts are programmability, reliability, and autonomy.
Smart contracts can be used for a lot of purposes:
- Executing transactions
- Controlling access rights
- Designing decentralized applications (dApps)
- Managing decentralized autonomous organizations (DAO)
- Organizing a supply chain
- Minting non-fungible tokens (NFTs) and controlling them
Publishers and advertisers can benefit from smart contracts, when setting up the terms and conditions of payment. Enter the KPI, specify the conditions, and input the rewards for completing a contract. Such system provides greater transparency and enjoys more credibility, because the conditions remain the same throughout the duration of the contract. Also, there is no 3rd party involved, which might be bribed or simply dislike one of the parties involved.
Pros and cons of smart contracts
Smart contracts are not flawless. Even though they encourage fair trade, they can be complicated and hard to write. The advantages of smart contracts are as follows:
- No intermediary — direct interaction between two parties on equal terms (without power abuse) and without any 3rd parties involved, thanks to the AI
- Transparency — true blockchain is based on revealing the data on all interactions to every participant of the chain, so the data is virtually immutable and can be checked at any time
- Lower costs — no intermediary = less money spent for unnecessary services, plus the increased transaction speed
Now, onto the disadvantages of smart contracts:
- Specific knowledge — you need to know how to communicate with the AI to make it follow your commands precisely
- Data exposure — while the parties involved are not necessarily shown to the rest of participants, the details of transactions are
- No turning back — once the contract is launched, there is almost no way to make the amendments
- Beta stage — smart contracts cannot be legally enforced, because they are not legalized; on top of that, technical errors can also occur
Long story short, a perfect smart contract is fair, exact, and enforcing. However, the world is not an ideal place, which is why human errors, hacking, technical errors, lack of active application, and other factors creep in. But keep in mind that Bitcoin didn’t top the charts and mainstream news outlets overnight. Smart contracts are a valid alternative to traditional contracts, where one party is dependent on another or there is an intermediary, which holds the power over both.
Since the information of a smart contract is stored on multiple devices, it is necessary to change the info details on the majority of them to make amendments. The more users a blockchain has — the harder it is to mess with the contract data. Smart contracts are not impenetrable but very robust. As for the details sharing, treat it as a stock exchange, where the data on transactions is shared, but nobody is able to link the data to a specific actor.
Smart contracts are a recent invention, which is why mistakes can happen. But don’t let this fact discourage you from trying them out. They have a vast range of applicability, affiliate marketing included. They can help you to get rid of the 3rd party and negotiate on equal terms with the party, which would otherwise have some influence over you.