What’s So ‘Smart’ About Smart Contracts?

With the growth of DeFi and Web3-based products, many entrepreneurs may be looking to blockchain technology not only as a source of greater financial flexibility but also as a means of safeguarding and ensuring completion of the business deals made across a range of industries.

Enter smart contracts: A smart contract is essentially a computer protocol (or code) on a blockchain that looks like a self-executing algorithm with certain actions (transferring currency, executing documents, etc.) once the conditions of a pre-set agreement are met. These contracts are self-executing, meaning no person has to sign along a dotted line or push a button; instead, these agreements between buyer and seller (or whatever parties are involved) are written directly into the lines of code.

These contracts are gaining popularity right now, with the smart contracts market expected to expand to nearly $1.08 billion by 2030 (from $190 million in 2022). This is largely due to their increasing adoption in fields such as banking and finance—both digital and classical—as well as industries such as supply chain, real estate, insurance, technology, and government.

A Smart Way Of Facilitating Transactions

Smart contracts eliminate any problems (and costs) associated with third-party execution. You don’t need lawyers, banks, government entities, or any other parties to oversee these contracts because they are entirely self-executing. This can save time, logistical hurdles, and money. They also offer a platform and eliminate a lot of the ambiguity associated with traditional contracts written in “legalese,” or with confusing terms of execution. Everyone knows and understands the terms. Everything is crystal clear from the beginning.

But what makes smart contracts particularly “smart” is not just their transparency or efficiency, but also their immutability. Nobody can cheat or game the system. The rules are “written” in blockchain, such that they cannot be altered, reneged upon, or executed differently than anyone intended. And there are no limitations to what type of deal a smart contract can execute: It can be as simple as “I give you one dollar, you give me one token,” or extremely complicated, like financing a spacecraft launch. Any deal can be circumscribed by a smart contract.

The Importance Of Checking Your Code

Are there vulnerabilities? Unfortunately, with the rise in cybercrime, smart contracts can be tampered with, just as systems and data stores can in any other industry. As cybercriminals become increasingly sophisticated, these contracts are subject to manipulation by bad actors, though hacking well-written code is extremely difficult. The quality of your code is inversely proportional to its vulnerability to hackers or other malfeasants. Code mistakes can allow a third party to execute the contract differently, deriving their own benefit. This is why it is incredibly important to make sure that your contract does not contain code smells. Having your smart contract designed by a smart contract architect (who has a good understanding of decentralized paradigms) and then audited can be a good safeguard against these problems, as a skilled auditor will be able to identify code problems that could be vulnerable to exploitation down the line.

A Look Ahead

More and more businesses across every industry are beginning to recognize the benefits of blockchain technology, with increasing rates of adoption and integration of smart contract technologies into regular business processes. When correctly executed, smart contracts bring incredible value to business transactions in today’s broadly digitized world, and the paradigm of security, transparency and immutability that they offer has the potential to become the gold standard for contracts in the future.