Smart contracts are the digital version of middlemen. Using blockchain technology, you can create and manage agreements with vendors, buyers, or suppliers without the need for a third party, like banks or lawyers.
The easy-to-use digital framework has disrupted many industries like insurance, lending, gaming, logistics, and more! They already power a huge ecosystem of applications and their blockchain use cases are growing rapidly. Let’s explore how smart contracts work and how to safely enter into one.
How Do Smart Contracts Work?
Smart contracts are nothing but a set of codes running on the blockchain. They perform specific functions, which are automatically executed when the "if, when/ then" conditions are met. They are mostly run on the Ethereum blockchain due to its ease of collaboration, which allows developers to easily latch on to the blockchain to create code for specific uses. This has revolutionized the way smart contracts are used.
Their biggest benefit is automation. Once the agreement has been signed, no third party can interrupt, stop, or make changes to the contract. It goes a long way towards helping businesses automate their tasks.
Another amazing benefit of smart contracts is that they are secure. They encrypt data that cannot be altered, thus protecting users. Also, the entire system is trustless. Simply put, trust is not an issue. Since the entire network is decentralized, a trade or transaction can be completed without worrying whether you can trust the other party or not.
They also get executed much faster in comparison to the traditional paper contract approach. Since all the clauses are predefined, execution happens efficiently.
Smart Contract Use Cases
- Digital ownership of assets such as NFTs
- Securing digital identity to make KYC a safe process.
- Making cross-border payments
- A frictionless way of handling loans and mortgages
- Recording and reporting financial data for companies
- In the case of governments, smart contracts can file records like land titles, provide efficiency in electronic elections and more.
- Tracking items in the supply chain
How Safe are Smart Contracts?
The harsh reality behind smart contracts is the fact that users without technical knowledge of the blockchain are at the mercy of the developers. Users can not really predetermine how safe or solid a smart contract is. That’s mainly because the simplicity of smart contract technology is also its bane. Any tech developer who has a bit of blockchain knowledge can claim to know about deploying smart contracts, which may put investors at risk. Because of this, several smart contracts are vulnerable to hacking due to problems with bugs and errors in coding. In fact, data has shown that over 30,000 smart contracts worth over $4 million are liable to hacks on the Ethereum blockchain. A recent example of this is the $SQUID crypto token, which had its smart contract dubiously configured to allow stealing money to the tune of $3.38 million from unsuspecting investors.
Another problem with smart contracts is a lack of regulation. The decentralized nature of cryptocurrency leaves its users all the more vulnerable. There aren’t any strict governing laws surrounding cryptocurrency, so there is no safety net to fall back on in case of mishaps or attacks. Agreeing to use a smart contract exposes users to a high level of vulnerability as legal liability becomes inherent due to the anonymity and non-accountability of the creators of the smart contract.
The permanence of smart contract codes deployed on the blockchain makes it extremely hard to correct flaws in the codes. On the one hand, the permanent code feature promotes security by ensuring that developers do not tamper with the operation of the codes after they have been launched. On the other hand, though, this also makes the correction of flaws almost impossible. Developers sometimes resort to creating new contracts to interact with the flawed contract in an attempt to improve the original contract. This is still a major source of concern because even a simple flaw, such as a bug in code, can jeopardize the security of the contract, making it vulnerable to hacking.
Tips to Stay Safe
- Get a code audit done to scan for bugs before signing the contract.
- Make sure not to include clauses with loopholes. For instance, when the Parity attack happened in 2017, hackers used a glitch in the smart contract to make themselves the sole owner of multiple wallets. They emptied out a whopping $31 million in ether from several wallets.
- Use only trusted blockchain tools. While Ethereum remains the most trusted place for smart contracts, other platforms like OpenSea, Polkadot, Solana, Hyperledger Fabric, and Tezos are popular too. As the saying goes, DYOR, or, do your own research!
- Offer ‘bug bounties’ or incentives to people who discover bugs in your contract code.
- Identify a scam project by analyzing its tokenomics. Most defective smart contract token projects contain a 99% buy fee, which ultimately stops buyers from being able to resell them immediately.
The Future of Smart Contracts
The advent of smart contracts and their multiple use cases has spurred ultra-fast improvements in the cryptocurrency industry. Many projects like Ethereum, BNB, Cardano, Avalanche, Algorand, etc. operate smart contracts on their blockchains.
Since these contracts remove the need for intermediaries, they are cost-efficient and require less fees. A lot of tasks get automated, like distributing funds, recording investments on blockchain ledgers, etc., making blockchain technology cheaper and more accessible to everyone. Soon we’ll see a lot more industries like healthcare and cybersecurity using this technology.
To sum up, smart contracts have huge benefits but also come under a legal grey area. Enter into a smart contract only on popular platforms.