If you've invested in Ethereum, you need to understand what smart contracts are. People are incredibly optimistic about the technology and there's good reason for it. Smart contracts significantly expand on the traditional blockchain's capabilities and the technology has even attracted the attention of several Fortune 500 companies.
Still not convinced? Have a look at Quorum, a fork of Ethereum that JP Morgan developed as a result of interest in Ethereum's smart contracts.
In this blog post, I go over what smart contracts are before shilling hard for the technology. But seriously, I really do believe in smart contracts.
What's a smart contract?
At a high level, smart contract technology let's you run code on the blockchain. Specifically, you can write a program (i.e. smart contract), deploy it on the blockchain like you would a transaction, and have blockchain nodes execute it.
Two main implications come out of smart contracts. First off, smart contracts can turn the blockchain into a cheap and accessible global supercomputer. Check out what Golem and SONM are doing in this space. The second implication is economical. Smart contracts allow the blockchain to conduct many new kinds of economic activities. Besides transferring money, blockchain users will be able to securely and transparently exchange things like consumer goods, company shares, services, and even property. No middleman required.
Example
Here's an example of how a smart contract can be used to rent an apartment:
Suppose you rent an apartment from me. You can do this through the blockchain by paying in cryptocurrency. You get a receipt which is held in our virtual contract; I give you the digital entry key which comes to you by a specified date. If the key doesn’t come on time, the blockchain releases a refund. If I send the key before the rental date, the function holds it releasing both the fee and key to you and me respectively when the date arrives. The system works on the If-Then premise and is witnessed by hundreds of people, so you can expect a faultless delivery. If I give you the key, I’m sure to be paid. If you send a certain amount in bitcoins, you receive the key. The document is automatically canceled after the time, and the code cannot be interfered by either of us without the other knowing, since all participants are simultaneously alerted. [blockgeeks.com]
How do smart contracts work on Ethereum?
Ethereum allows smart contracts to be written using a Turing complete programming language. A popular implementation of such a language is Solidity, developed by the Ethereum team themselves. Smart contract code is executed by the Ethereum Virtual Machine (EVM), which runs as part of every full Ethereum node.
It's interesting to note that every single operation that is executed inside the EVM is simultaneously executed by every full node in the network. This means that computational steps on the EVM are expensive and it's recommended that you only run simple programs.
Computational costs are measured by a resource called gas. Each operation you do on the EVM costs gas and the gas consumed by your contract needs to be paid in ether based on a gas/ether price that changes dynamically.
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What's so great about smart contracts?
Smart contracts are great because they allow you to do many useful things on the blockchain cheaply, transparently, and securely. Some would even argue that smart contracts will result in an economic paradigm shift where middlemen services are supplanted by democratized processes running on blockchains.
Cutting out the middlemen for Internet services
One example is the replacement of Internet broker companies such as Airbnb, Amazon, and Uber with smart contracts. A service like Airbnb is desirable because it obviates the need for the host and the guest to trust each other, they need only trust Airbnb. With smart contracts, the host and the guest can forego Airbnb and put their trust on the blockchain. In doing so, they avoid paying Airbnb's high brokering fees.
Cutting out the middlemen in real estate
Real estate is another example of an industry that could be improved via smart contracts. The industry is notorious for high middleman fees because of the numerous intermediaries that need to be involved in order to complete a transaction. According to the International Blockchain Real Estate Association (IBREA), using smart contracts means many of these intermediaries such as brokers, government property databases, title companies, escrow companies, inspectors and appraisers, and notary publics, would no longer be needed.
Secure and fair betting and lotteries
Besides cutting out middleman fees, smart contracts are great when transparency and fairness are desired. Good examples include betting and lottery services. It's not a stretch to assume people would prefer to bet their money with a betting house using the blockchain over a betting house using a black box system. The same goes for lotteries.
Secure and fair voting
Another more important example of an activity where transparency and fairness are desired is voting. In the last US election cycle, there have been numerous claims of voter fraud. These allegations have undermined trust and also highlighted an inherent flaw in the election process: it's incredibly hard for most individuals in the electorate to independently verify that vote counting has been fair. Conducting an election on the blockchain will allow any citizen to quickly and independently verify fairness. This is huge for maintaining democracies.
Support and interest from Fortune 500 companies
Finally, instead of pondering what smart contracts could potentially be used for, here's something that's already happened. Hundreds of companies, including many Fortune 500 companies, are backing smart contract technology through membership in the Enterprise Ethereum Alliance. These companies include JP Morgan, Microsoft, Deloitte, and the National Back of Canada.
As I've mentioned before, JP Morgan even developed their own version of Ethereum called Quorum.
Smart contracts in the short term
According to Andreas Antonopoulos, in the long run, the blockchain is much more than just a currency system. There're so many game-changing applications for the blockchain that haven't been realized yet. However, these applications are not possible without widespread adoption of the technology and right now, we're not there yet.
Antonopoulos lays out three criteria that a smart contract product needs to meet in order to be successful:
- A viable market
- Timing
- Sequencing, i.e. having the right prerequisites in place
He believes that criteria 1 has been met while the criteria 2 and 3 have not. There is no doubt that there will be demand for smart contract products given the benefits of using the blockchain. Unfortunately, Antonopoulos believes there isn't enough blockchain adoption for smart contract products to succeed. This won't stop entrepreneurs from trying though and there'll be a bunch of new smart contract companies as well as an equally enthusiastic group of early investors.
If Antonopoulos is right and smart contract products are more hype than substance right now, then it's bad news in the short term. If Antonopoulos is wrong and blockchain adoption happens faster than expected, then those who invested in smart contract technology will be rewarded early.
Smart contracts in the long term
Besides the risk of unforeseen scaling issues or security flaws, there's good reason to be incredibly optimistic for the future of smart contract technology.
Original post: https://storeofvalue.github.io/posts/smart-contracts-are-great/