Smart contracts are programs that run on a blockchain. They contain code that automatically executes predefined logic when certain conditions are met.
For blockchain developers, smart contracts are one of the main ways to build applications and use blockchain technology.
How smart contracts work
When developers create a smart contract, they define:
How users can interact with the contract
What transactions can occur
What conditions must be satisfied
What actions should happen when those conditions are satisfied
For example, imagine two or more friends playing a game for prize money. A smart contract could contain logic such as:
If the game is won, transfer the prize money to the winner.
The contract can automatically carry out this action without requiring a third party to manually distribute the money.
Because the blockchain is decentralized, smart contracts can create multi-party agreements without requiring a single party to have complete control over the agreement.
Example of a smart contract
Smart contracts can be written in programming languages such as Solidity, which is commonly used on Ethereum.
A simple contract might contain:
A variable called
messagethat stores informationA function that allows the message to be updated
The basic idea is:
The contract starts with an initial message.
A user interacts with the contract.
The update function changes the stored message.
The transaction is recorded on the blockchain.
Advantages of smart contracts
1. Tamper resistance
Once a smart contract has been deployed, changing its underlying logic can be difficult or impossible, depending on how the contract was designed.
This can be an advantage because the rules of the application are not easily changed by one party.
However, this characteristic can also create problems, particularly when the contract contains bugs.
2. Transparency
Blockchain transactions are generally publicly verifiable.
Users can use block explorers to examine blockchain activity and transaction information. For example, on Ethereum, a block explorer can allow users to search using information such as:
Transaction hash
Block hash
Blockchain address
A transaction page can show information such as:
The sender
The recipient
The amount transferred
The transaction time
Transaction fees
This allows people around the world to independently inspect blockchain activity.
3. Reduced need for intermediaries
Smart contracts can automate agreements between parties without requiring traditional intermediaries to perform every step.
For example, instead of having a third party manually verify an agreement and execute a payment, the smart contract can perform the programmed actions when its conditions are satisfied.
This can potentially reduce certain costs and administrative work.
4. Automation
Smart contracts can execute tasks automatically.
Once the required conditions are met, the blockchain can execute the contract's programmed logic without someone having to manually perform the task.
This can reduce the time and operational effort required for certain processes.
Disadvantages of smart contracts
1. Scaling challenges
Blockchain networks can have difficulty handling large numbers of transactions efficiently.
The amount of computation required, the type of transaction, and the size of the transaction can affect how quickly transactions can be processed.
Throughput refers to the rate at which transactions are processed or completed.
Higher computational requirements and network activity can therefore create challenges when trying to scale blockchain applications.
2. Difficulties fixing bugs
The tamper-resistant nature of smart contracts is both an advantage and a disadvantage.
If developers discover a bug after deployment, they may not be able to simply edit the contract's code like they could with a normal application.
Depending on how the contract was designed, developers may need mechanisms such as an upgradeable contract, migration to a new contract, or other predefined recovery mechanisms.
This is why testing and auditing smart contracts before deployment are extremely important.
A useful way to think about a smart contract is:
Smart contract = blockchain-based program + predefined rules + automatic execution
Smart contracts allow developers to create applications where rules and actions are enforced by blockchain code rather than relying entirely on a central intermediary. Their major benefits include automation, transparency, reduced reliance on intermediaries, and tamper resistance, while important challenges include scalability, transaction costs, and difficulty correcting deployed code.