As blockchain technology advances outside of cryptocurrency applications, concepts like smart contracts benefit by providing increased security, speed, and data integrity compared to traditional methods. Though most commonly associated with distributed applications, companies are increasingly using permissioned blockchains to tap into the benefits of blockchain for private organizations.
Business leaders who want to embrace this evolving technology should understand the best use cases for different types of blockchains and the best programming languages for writing smart contracts.
What Is a Smart Contract in Blockchain?
A smart contract is a program that runs when certain pre-established conditions are met and is stored on a blockchain. When the predetermined conditions are met, the program automatically runs. This eliminates the need for an intermediary, which reduces costs and time loss associated with executing the contracts. Smart contracts are used independently or within a workflow by triggering the next event when conditions are met.
Why Is Blockchain the Future?
Many people have speculated on the future of the internet and the rise of Web 3.0. While it's too early to know how it will play out, blockchain implementation could have a major role in the next iteration of the internet. With the rise of social media and the tech giants gatekeeping the internet and profiting off of individuals' data, there's been a backlash against this consolidation of power.
Web 3.0 advocates propose putting power back in the hands of individuals through democratizing data with the use of blockchain technology. In this model, data isn't stored by web applications. Instead, it's stored in the blockchain and is available to anyone who needs it and is authorized to access it. Data is distributed, uncensored, uncurated, and authoritative.
Benefits of Smart Contracts
Smart contracts represent a fundamental shift in application architecture—their automated and secure functionality offers a significant advantage over the manual processes involved in building traditional contracts. Aside from labor savings, using blockchain to execute smart contracts offer several other distinct benefits.
Smart contracts record all terms, conditions, and transactions in detail. There is no paperwork to fill out manually that could result in errors. The process is completely automated, and the conditions have to be met before the contract is executed.
There are no third parties involved in smart contracts, and the records are shared with all participants. The transparent nature of the transactions ensures they haven't been altered or hidden. Once a contract is executed, there's no way to alter or dispute it.
All blockchain transactions are encrypted using the highest level of data encryption, which makes them difficult to hack. Additionally, each transaction is connected to the ones before and after it, so a hacker would have to change the entire record in order to change one transaction. However, there are security vulnerabilities in blockchain, and they've fallen far short of being unhackable.
Smart contracts can be executed much faster than traditional transactions because there's no time lost to manually processing transactions or going through an intermediary. There's no need to wait for validation or access from a gatekeeper, since the data is stored in the blockchain.
Because of the blockchain's accuracy and transparency, secure smart contracts don't rely on trust. Users never have to wonder if the data is accurate or the transactions have been manipulated, so everyone who participates verifies the process.
Blockchain smart contracts eliminate the need for middlemen and other intermediaries. There's no need for banks, lawyers, or other web applications to facilitate transactions. This significantly reduces the costs associated with executing the contracts.
Smart contracts are automatically updated each time a transaction is added to the blockchain. There's no need for expensive manual updates that are expensive, slow, and inaccurate.
Limitations of Smart Contracts
Outside of the financial sector and supply chain management, smart contracts aren’t widely used in everyday operations. While blockchain technology must advance to address limitations, awareness of the technology needs to grow in tandem. Although blockchain smart contracts offer a lot in the way of innovation and security, there are some drawbacks to using them. The following are some common disadvantages of smart contracts.
Traditional contracts are drafted and examined by lawyers who have years of experience interpreting legal language. While smart contracts can fulfill many of the same functions that traditional contracts do, they do it in programming language. Since code isn't accessible to most people, they may not fully understand the terms of the contract before they commit.
Blockchain is also a relatively new technology, so courts don't have a lot of experience in settling disputes about them. If conflicts arise, it may be nearly impossible to seek a legal remedy.
Reliance on Third-Party Data
Smart contracts, particularly in the financial sector, often use third-party data feeds, called oracles, to initiate some functions. If this data is compromised, it opens up a surface of attack for bad actors.
Value DeFi lost $6 million in this type of attack after hackers were able to manipulate the price of its tokens by exploiting a vulnerability in a centralized price oracle.
Difficulty Amending or Correcting Contracts
Due to their nature, it's almost impossible to amend a smart contract. If a vendor wants to overlook a late payment to maintain a relationship but the smart contract doesn't allow for that, it can't be done. Even if multiple parties want to change the contract, it may not be possible. Similarly, it's extremely difficult to change the code of a smart contract if errors are found after it's been executed.
Once dubbed unhackable, blockchain smart contracts have proven to be as vulnerable to bad actors as any other technology. Last year, hackers stole over $2 billion in assets using cross-chain bridge hacks. Many of these vulnerabilities come from adjacent technology rather than from the blockchain itself. However, errors in blockchain code can also be exploited and can't be fixed with a patch the way other programs can.
Applications of Blockchain Smart Contracts
A single smart contract works on an if/then conditional: If X happens, then Y happens. For most applications, this isn't enough complexity to be functional. Sophisticated dApps (decentralized applications) bundle many smart contracts together to increase their functionality. Some ways smart contracts are being used currently include the following:
- Finance: DeFi, or decentralized finance, is offering a blockchain-powered alternative to traditional financial services such as lending, borrowing, and trading.
- Gaming: Blockchain technology in gaming revolves largely around NFTs (non-fungible tokens) and use smart contracts to allow players to purchase and save in-game purchases, sell to others, or move them to another game.
- Legal contracts: Smart contracts have the potential to replace many types of legal contacts used to conduct business in addition to more traditional contracts such as marriage licenses.
- Real estate: Blockchain smart contracts are being used to fractionalize real estate ownership, thus lowering the barrier to investment. The Republic of Georgia has already implemented blockchain-based title registry for land, and other countries are following suit.
- Manufacturing: Block-chain technology is used to increase supply-chain transparency by sharing data among supply-chain stakeholders and keeping everyone up to date in real time.
Types of Blockchain Technologies
All blockchain protocols consist of three types of technologies, including cryptographic keys, a peer-to-peer network with a shared ledger, and a means of computing to store the transactions of the network. The cryptographic keys consist of a public and private key that produce a secure digital identity reference.
The peer-to-peer network acts as the authority to reach a consensus on transactions that use the digital identity. When a transaction is authorized, it results in a successful, secured transaction between the two parties connected on the network.
Private Blockchain Networks
One authority manages a private blockchain network. A private network is closed and primarily used by private businesses and organizations. Security considerations, such as accessibility and authorization preferences, can be customized on private blockchain networks.
Public Blockchain Networks
Public blockchains are available to anyone. Bitcoins and other cryptocurrencies operate on public blockchains. They use DLT (distributed ledger technology), which distributes data across the peer-to-peer network. Public blockchains use consensus to validate transactions. Two of the most common types of consensus algorithms are proof of work and proof of stake.
Permissioned Blockchain Networks
Permissioned blockchain networks are often referred to as hybrid networks. They're private blockchain networks that allow special access for authorized individuals. Permissioned blockchains are frequently used by organizations that need to control who participates in the network and in which transactions. They are also used when identities need to be verified, such as when complying with data protection regulations.
Consortium Blockchain Networks
Consortium blockchain networks are similar to permissioned blockchain networks except that they're used by multiple organizations. They offer better security than permissioned blockchains, and they're ideal when multiple organizations are collaborating.
What Language are Smart Contracts Written In?
Blockchain smart contracts are written on different platforms and with different languages. Not all platforms work with all languages, so the choice of one will influence the choice of the other.
The biggest downside to programming blockchain smart contracts with Solidity is its relative age. While it has a large community that is constantly contributing to its library and tools, it simply hasn't been around long enough to have a complete resource. Users will likely have to develop their own solutions for some issues.
Rust is a low-level language that's fast and efficient, making it particularly well suited for blockchain smart contracts. It has no garbage collector and compiles a detailed error report to help users track down bugs. As a low-level language, Rust is optimal for building decentralized apps with a high throughput. Rust's predictability means a program won't surprise users, a critical factor when writing smart contracts.
Some disadvantages to using Rust include its verbosity. Users write more code when using Rust when compared to more efficient languages such as Python. Developers may also struggle with learning it since it contains new concepts. As a new language, Rust doesn't have the extensive collection of resources that more established languages do.
Vyper was created specifically to mitigate the security issues in Solidity, although it was built to complement Solidity, not replace it. Vyper's syntax is very similar to Python, so if developers know Python, they’ll likely be able to pick up Vyper. Because it was written to make smart contracts more secure, it lacks many features of Python. However, it supports smart contract features like event notifiers, custom global variables, and global constants.
Best Blockchain Platforms for Smart Contracts
While Ethereum is the most popular smart contract platform, a different one may be better suited for a user’s specific needs. Speed and capacity differ between platforms, so depending on an organization's priorities, certain functionalities may appeal to different businesses. The top smart contract platforms include the following:
Launched in 2015, Ethereum is the most widely used blockchain smart contract platform. The biggest advantages of using an Ethereum smart contract is its level of support and standardization. Ethereum's clearly defined rules for developers make writing smart contracts easier and more secure, although there have been some significant security issues with the platform.
In addition to security issues, another concern with using Ethereum is its popularity. The decentralized platform frequently runs at 100% capacity, which could interfere with a contract's performance. It's also one of the more expensive smart contract platforms to use. Despite its shortcomings, Ethereum is usually the best smart contract platform for general-use smart contracts. Ethereum can be used for almost any type of decentralized application.
Hyperledger Fabric was developed in 2015 by The Linux Foundation and over 30 corporate co-founders. Because it is a permissioned blockchain, participants' identities are known and authentication is required. Hyperledger Fabric is a good choice for organizations that deal with sensitive data and need to comply with data protection regulations.
Hyperledger Fabric allows developers to use modules to compose smart contracts in almost any programming language, which provides more versatility. With its modular architecture, Hyperledger Fabric lets programmers develop solutions for a wide variety of use cases. The smart contract platform was designed to ensure the highest level of enterprise security, making it a good choice if users don't need anonymity and security is a top concern.
Polkadot was created by Gavin Wood, one of Ethereum's co-founders. Polkadot runs multiple chains inside of its blockchain, a process called sharding. This allows it to run more transactions than usual. Polkadot was designed to connect blockchains securely.
Polkadot is a high-performance blockchain smart contract platform that is able to handle over 1,000 transactions per second. This is far more than the 13 to 30 transactions per second that Ethereum typically handles. It's also much cheaper to use than Ethereum. If users need to combine multiple blockchains, Polkadot is an ideal platform to use.
Blockchains and Smart Contracts for the Internet of Things (IoT)
The IoT connects people, products, and places. The IoT is one of the major components of the Fourth Industrial Revolution. Unfortunately, security concerns have hindered adoption of the IoT in some cases. IoT devices are often prone to security vulnerabilities. Another problem with the widespread adoption of IoT devices is the strain they put on centralized systems.
Using blockchain smart contracts with the IoT helps alleviate the issues associated with widespread adoption of the IoT. Blockchain technology accelerates the use of the IoT by alleviating security concerns and decentralizing the massive amounts of data generated by IoT devices.
Get Help Developing Smart Contracts
The best language and platform for developing smart contracts will depend on your specific use case. Understanding the ideal use cases for different types of blockchain will help you make a decision.
No matter which type of blockchain you want to implement, only the right developers can help you do it. If you need to hire blockchain developers, Revelo matches you up with developers skilled in software development and coding smart contracts.
Contact us to find out how we connect you to the tech talent you need.