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Overview: Smart Contracts and Blockchains

Published on : 03 Mar 2021

Smart Contracts and Blockchains

Smart Contracts, the anchored scripts on blockchains, permit the transparent execution of predefined processes. Using smart contracts, assets like money become programmable, which opens up previously inaccessible application potential. Smart contracts are exceptionally effective and control billions in value.

Popular now, however, invented in 1994, when modern cryptography was in fashion, Smart Contracts aimed to improve the contractual relationships by enforcing clauses and further enabling multiple parties to operate at a distance. Most of the sectors, particularly the financial services sectors, life sciences and healthcare, energy resources and voting have used smart contract in some way or the other. Moreover, with the advent of blockchain, smart contracts have created a potential impact on daily lives.

With the surfacing of blockchain, smart contracts are indeed one of the most sought-after technologies due to its high customizability added to the transactions. Smart contracts do bring along challenges encumbering the stakeholders who interact with them, the users, developers and the organizations built on top of smart contracts.

Blockchain is comparatively a pop culture in the series of digital technologies that, due to their decentralized, horizontal, distributed and open-source nature, are expected to cause fundamental and large-scale changes in how the current social, economic, political relations and institutions are organized.

Blockchain technology is best described as a distributed, append-only database, which enables transactions between human or software agents, without a central trusted intermediary. Blockchain is seen as a distributed ledger, where every user has a continuously updated authoritative copy. Anyone having access to the ledger has access to the same full transaction history and can verify the validity of all records. Sophisticated consensus mechanisms ensure that new entries can only be added to this distributed database if they are consistent with earlier records. Any type of data can be recorded in the distributed database. One may save an arbitrary piece of information on the blockchain, and that shall become part of the permanent record.

Blockchain-based smart contracts, being self-executing code automatically implementing the terms of an agreement between parties are with certainty a critical step forward. They streamline processes which are currently spread across several databases and multiple ERP systems. So what are blockchain-based smart contracts?

Smart contracts, next-gen in the progression of blockchains from a financial transaction protocol to an all-purpose utility. They are considered as pieces of software and not contracts in the legal sense. They extend blockchains’ utility as they keep a record of financial transaction entries and automatically implement the terms of multi-party agreements. Smart contracts are executed using consensus protocols on the computer network to agree upon the sequence of actions resulting from the contract’s code. There is the benefit of reduced risk of error or manipulation as the agreed terms are executed automatically.

Prior to the blockchain era, smart contracts of this kind were impossible as the parties to the agreement would maintain separate databases. Having the shared database running a blockchain protocol, the smart contracts are automatically executed, and all parties are validating the outcome instantaneously without any need for a third-party intermediary.

But why would companies employ blockchain-enabled smart contracts instead of their existing technology? Blockchain-enabled smart contracts are a viable option, especially when frequent transactions occur among a network of parties, and duplicative tasks are performed by counterparties for every transaction. The blockchain is a shared database for providing a secure, single source of truth, and smart contracts automated approvals, calculations, and other transacting activities that are otherwise prone to lag and error.

Benefits of blockchain-based smart contracts

  1. Speed and Accuracy:

The usage of software code to automate tasks increases the speed of the otherwise manually done tasks. Automated transactions pose a lesser risk and are lesser prone to any manual error or manipulation.

  1. Lower execution risk:

The execution is automatically managed by the network rather than manually by an individual party. This eliminates the risk of manipulation, non-performance, and errors.

  1. Elimination of intermediaries:

Smart contracts reduce and eliminate third-party intermediaries that provide "trust" services.

  1. Economical:

As human intervention is lesser and there are fewer intermediaries involved, there will be reduced costs in the processes. 

Smart contracts are no more than business rules translated into software. 

What is the difference between smart contracts and business rules automation software or stored procedures? Smart contracts have the ability to support automated processes which stretch across corporate boundaries, involving multiple organizations; which the existing ways of automating business rules are unable to do. However, even if designed and programmed correctly, a smart contract isn't considered to be smart as it just blindly functions as designed to function.

Quality programming is one important factor as the smart contract is only as good as the rules used for automating processes with the accuracy of the data fed into a smart contract being the second important factor. The smart contract rules are unalterable once put in place, and neither the user nor programmer can change it.

So, what happens if the data is false? The smart contract shall not work properly. Data is fed into blockchains which are used for smart contract execution from external sources. Oracles are the real-time data feeds for blockchains and are essentially the intermediate layer between the data and the contract.

While blockchains may be decentralized across several nodes, smart contracts run on a single node. The blockchain nodes cannot interpret or verify the workings of a particular smart contract; any consortium of companies which are part of a blockchain network must place their reliance on one oracle for information fed into the smart contract.

One has to place reliance on the word of the company running the server on which the oracle and smart contract reside to believe the accuracy of the information being fed to the blockchain.

Challenges of Smart Contract Data and Blockchains

  1. Trust:

Oracles traditionally transmitted data from a single source, there is no perfectly trustworthy data. The data may be benignly or maliciously corrupted because of faulty web sites, cheating service providers, or errors.

  1. Contingency:

The enforceability of a smart contract is deterministic, and it can absolutely be enforced only when the events related to its contractual clauses occur. Smart contracts are contingent on events, contingent on market events, for instance, in trade finance, the contingency is on shipping data.

  1. Uniformity:

Constructing the smart contracts is becoming relatively easier with the advent of new programming tools which enable the businesses to pull together the basics of a smart contract. However, the difficulty arises in ensuring that every network participant is running the same version of a smart contract.

  1. Flexibility:

Considering the immutability of blockchain-based smart contracts, the developers must anticipate any conceivable scenario that might necessitate alterations to the contract.

  1. Privacy:

The code within smart contracts is accessible and visible to all parties within the network, which might not be acceptable for all applications.

  1. Latency:

Blockchains suffer from high latency, considering that time passes for each verified block of transactions to be added to the ledger. Consider Ethereum, the most popular blockchain for smart contracts; this occurs approximately every 17 seconds, a far cry from the milliseconds while using non-blockchain databases.

  1. Permission:

Even though the smart contracts are popular in both permission-less and permissioned blockchains, the latter is likely to see faster adoption in industries, considering the complexities around trust, privacy and scalability are comparatively easily resolved within a consortium of known parties.


There are technologies which are successfully addressing issues of privacy and enabling greater trust of oracles. Smart contracts are here to stay and positioned for wider adoption. There are already start-ups pairing smart contracts with IoT devices for providing access via smart locks or automatically enabling electric vehicle charging stations. Pushing of the IoT sensor data to the blockchain is also opening up countless possibilities. However, it is yet to be seen if any revised legislation shall accommodate smart contracts or recognize smart contracts which are critical for some applications of smart contracts. 

In fact, in the coming years, the massive growth in IoT connected devices shall spur greater use of smart contracts. It is predicted that a major portion of the 46 billion industrial and enterprise devices connected in 2023 will rely on edge computing. This can further make addressing standardization and deployment issues crucial. Smart contracts could offer a standardized method for accelerating data exchange and enabling processes between IoT devices by removing the middleman: the server or cloud service that is the central communication spoke for requests and other traffic among IoT devices on a network.

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