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Smart contracts: definition, features, and functions
What is a smart contract_
Cryptocurrency
19.09.2021
Updated 28.11.2021
11:45

For the first time, a theoretical prototype of this phenomenon was described back in the last century. In the 1990s, Nick Szabo, who found in this term the description of the technology designed to provide security of computer networks, invented it. In the 21st century, the theory developed into something real and gained its definition.

A smart contract is a special app or program that has developed and been operating on the basis of blockchain. Usually, such a program is created in the form of a unique digital agreement with a strict set of rules. Its violation is impossible since the consolidation has already been made with the help of blockchain and is guaranteed by its nodes. 

Smart contracts are perfectly applied to implement trust protocols. Thus, parties receive an opportunity to undertake bilateral commitments without the need to be familiar with each other. And in the situation when somebody violates the contract terms, the agreement will be annulated in favor of a fair party. Thanks to such an approach, the need to use the services of a mediator eliminates as well. That is because the technology of a distributed register, which is bitcoin, does it instead of him.

Despite the fact that for the first time this opportunity was implemented on Bitcoin blockchain, the popularization of smart contracts is connected to Ethereum. Vitalik Buterin and his team of the cryptocurrency tried to do everything possible to promote the idea of using smart contracts, and they succeeded in it.

Today, smart contracts executed on the Ethereum virtual machine (EVM) have become one of the most important and demanded parts of the second cryptocurrency in the world and its blockchain.

Features of smart contract functioning 

A smart contract is a program operating under strictly set conditions. If they are met, the code executes a predefined action. Thus, the main essence can be reflected in such an algorithm: ‘if event X happened, this action must be executed…’.

Despite its name, the program of this type itself isn’t smart and isn’t a legal contract. In fact, that is a standard code launched and executed with the help of blockchain technology.

Each smart contract includes such components:

The first public key is provided by the creator of the smart contract. The second one is a unique digital identifier making the program unique within this blockchain.

Main properties of smart contracts 

Most smart contracts are united by such common properties:

  1. They are distributed by a decentralized blockchain, which provides them with efficient protection.
  2. They always perform an action previously set to them when executing necessary conditions and don’t require these conditions to be executed by someone specific.
  3. They possess a high degree of autonomy and may endlessly wait for actions that would initialize the execution of their code.
  4. After the development and further activation, they cannot be modified. Their status changes only in the process of execution of the functions.
  5. Following various paradigms, they have a very flexible list of adjustments and a possibility of development.
  6. They are fully transparent to be studied, and their source code may be viewed by any blockchain user.

Modification or deletion of smart contracts: myth or reality 

The smart contract activation is the last action before which you can amend its source code. After the launch, it’s impossible to add even new functions. 

On the other hand, developers may add an option to ‘self-destruct’ to the source code of the smart contract, which allows deleting a contract with the following replacement of it by a new program. But if it wasn’t added beforehand, the deletion won’t be possible.
However, there’s a way around it, used by developers to create so-called ‘upgradable smart contracts’. What’s required to do that is to:

By doing that, they manage to create a branch of interdependent smart contracts, a part of which can easily be deleted or replaced by others. Meanwhile, the most important basis remains unchangeable.

Where and for what smart contracts are used 

Taking into account the reliability of the fixation of information in smart contracts, their easy configuration, and different types of development, they are often used as a:

  1. Decentralized program that autonomously (independently) executes a function intended to be implemented by it.
  2. Tool for fixation of the information, ensuring the transparency and fairness of that or another activity.
  3. Code reducing operating costs.
  4. Program, which increases the efficiency of an activity and reduces bureaucratic expenditure.

The advantages of smart contracts are especially noticeable at the moment when there’s a need to exchange some valuables (as a rule, money) between two or more users. With the help of a blockchain-based program, the need to attract a third party (a guarantor) is eliminated; the program will also meet the requirements only in case there’s the absence of fraud and manipulations from the side of any participant of the deal.

The scenarios in which smart contracts may be used are maximally diverse. Some of them are also used to create tokenized assets (transferring some precious artworks or even objects of the real world to the blockchain), blockchain-based stocks, the most reliable and secured from hackers systems of mass voting, etc.

Main disadvantages of smart contracts

You shouldn’t approach smart contracts as a perfect solution having no disadvantages. The most significant cons of these programs are the following:

General conclusions on smart contracts 

Smart contracts are one of the most useful things the cryptocurrency field has created, and it’s hard to doubt it. They made a revolution in the field of blockchain technologies. Probably, in the near future, it will be smart contracts that are responsible for a widespread basis for agreements, financial services, and so on.

But their potential isn’t fully studied yet, neither possible risks are. And only time will tell whether this technology will manage to get rid of most disadvantages it has as well as transfer to global implementation to the lives of people.