Smart Contract Developments

Introduction

Definition and evolution of smart contracts

Smart Contracts were introduced by Nick Szabo, a legendary computer scientist and a fascinating polymath. He is the same individual who invented the virtual currency “Bit Gold”. Szabo defined smart contracts as computerised transaction protocols that execute the terms of the contract minimizing the need for trusted intermediaries. At the time when he introduced these contracts, the technology needed to execute them wasn’t available, as certain conditions had to be met before the process was carried out.

However, with the introduction of Blockchain technology, the execution of smart contracts seemed possible. Szabo had created these contracts with its main aim being people should be able to carry out transactions with one another, despite not knowing each other beforehand. Blockchain a decentralized ledger whose main principle was to eliminate intermediaries provided the grounds for the execution of them.

Ethereum is known as the birthplace of modern smart contracts which enables a faster, easier and more transparent use of them. The transactions can be easily tracked and cannot be hampered by anyone.

Latest Developments in Smart Contract Technology

New Programming Languages

Smart Contract development takes time and effort, one can only develop a smart contract if one knows the programming languages. Smart contract programming languages are coding languages that help you write contracts. There are different languages for different blockchain platforms, which means there is no uniform programming language that can be applied to develop them. After choosing a particular blockchain, your options for coding languages narrow down to one or two. The leading languages are :

• Solidity :- it was the first smart contract language and the most preferred programming language. This language is specifically for them which are to be developed on the Ethereum Blockchain

Move

Move is the latest programming language developed by Facebook, which is specifically designed for building smart contracts on the Libra and Diem Blockchain. Unique features of the Move programming languages are :

• Move does not have a default type system enforced for digital assets such as Ether or Bitcoin.
• Move is a statically typed language, which makes it easy to identify errors in code and prevent bugs in the contracts.
• Move is free from the concerns of limits in defining custom data types of procedures.

Plutus

Plutus is the programming language for the Cardano Blockchain. It help develop Decentralized applications (DApps) on the Cardano Blockchain. It is based on the Haskell programming language and Lambda calculus, implementing the best features of components. Unique features of the Plutus programming language are :

• It provides an easier way to check the correctness of the smart contracts.
• This language offers more safety and user-friendly tokens which help coders in reducing the amount of code required to be written, which is not possible on other blockchain platforms.
• The safety and convenience it offers compared to its competitors such as Mastercard Blockchain, Ethereum and Hyperledger make it unique.

Scaling Solutions

One key challenge that smart contracts inherited from decentralized blockchains is the trilemma that the objectives of scalability, security, and decentralization cannot be achieved on-chain at the same time. While all three challenges cannot be neglected, the lack of scalability is the most important as it leads to a lack of decentralization.

State channels

State channels are a type of layer 2 solution that allows two or more parties to conduct multiple transactions off-chain, without displaying the transactions on the public blockchain network. This leads to a reduction in the number of transactions which need to be processed by the network, significantly improving the scalability and reducing fees as well.

Lightning network is an example that uses state channels and operates on top of the Bitcoin Blockchain. It provides instant settlement and reduces the transaction fees.

Layer 2 protocols

Layer 2 protocols operate on top of Layer 1 blockchain improving the privacy, scalability of the underlying blockchain, hence making it more efficient and reducing transaction cost. The most common solutions are state channels, sidechains, optimistic rollups and zero knowledge rollups.

Oracles and Off-Chain Resources

A lot of difficulty is faced in connecting outside information sources to blockchain smart contracts, in a language that they both understand. Oracle acts as an intermediary in translating the outside information data to the blockchain. Without the introduction of Oracles into the crypto ecosystem it would be impossible for them to serve in the real world.

Chainlink

A popular off-chain solution for scaling smart contracts is Chainlink, a leading platform that provides data feeds to smart contracts in various DeFi protocols and networks. It is the most extensively used decentralized oracle network.

Chainlink is an ecosystem consisting of numerous decentralized oracle networks, each oracle network can provide multitude of services without cross depending on other oracle networks. DeFi platforms like AAVE and Synthetix use chainlink data feed to obtain real time asset prices in smart contracts.

Industry Applications

Financial Services

Many sectors are rapidly adopting smart contracts due to their speed, transparency and traceability. Banks and other financial institutions are also utilizing smart contracts to lower their transaction costs and eliminate middlemen.

Traditional contracts involve a lot of paperwork which is essential to maintain for audit purposes. Smart contracts record all the transactions in a decentralized form on distributed ledger technology i.e., blockchain which is easily accessible and auditable.

Financial institutions and their clients benefit a lot from smart contract implementation. Banks can reduce their costs by removing intermediaries and streamline their processes saving time and money. Clients gain from simple, safe, and reduced-cost transactions. 

Asset tokenization 

Asset Tokenization is the process of creating ownership rights of physical assets into digital tokens on blockchain. Blockchain ensures that after you buy a token representing a physical asset, no authority can change or erase your ownership. Traditional assets like venture capital funds, real estate, shares, artwork, sports team all use blockchain technology to tokenize their assets.

Two types of Tokens, fungible tokens and non-fungible tokens

Decentralized finance

DeFi (Decentralized Finance) is a broad term for financial services that includes public blockchains and mostly focuses on Ethereum. Along with the help of DeFi you can do most of the things that are related to bank support such as earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and many more by which you don’t require paperwork or any other third party.

 Decentralized finance, or DeFi, also uses new technology that helps to remove third parties, so it uses security protocols, connectivity, software, and hardware advancements and this system removes intermediaries like banks and other financial service companies.

Supply Chain

Supply chain is a network of companies and people involved in production and delivery of a product or service. Supply chain management is the process of planning, executing, coordinating the production of goods and services from the source to the end customer. The main aim is to enhance efficiency, improve quality, reduce costs and improve customer satisfaction.

Automated payments

Smart Contracts are a powerful tool in enhancing the way supply chains operate. The use of smart contracts in supply chain management provides a high level of transparency and helps in automating various processes in the supply chain, such as payments, quality controls and compliance checks. Automating the processes helps save time and money, allowing companies to focus on other parts of the business.

Dynamic pricing

One of the major advantages of using smart contracts in the supply chain is the elimination of middlemen resulting in a lot of reduction of costs. Smart Contracts help companies streamline their  process by removing middlemen, for example by removing the need for a third party logistics provider, a company can save on shipping costs.

It helps in eliminating the need for a third party payment processor by automatically releasing payments to a supplier once the product has been delivered and checked.

IoT Devices

Device identity & access

Iot or “Internet of Things” is the network of physical devices, vehicles, home appliances, and other items embedded with electronics, software, sensors, actuators, and connectivity which enables these objects to connect and exchange data.

Device Identity and access management is one of the important aspects of IoT security which guarantees that sensitive data is only accessible to authorized users and devices. Smart contracts help in collecting and storing IoT data in a more secure and decentralized form. It helps in keeping the data more accurate and up-to-date, eliminating the need to manually enter data.

Remote operations

The word “remote” refers to the ability to control or access something from a distance. Remote operation means being able to monitor, manage and control a device from a far away location. It allows users to operate and adjust the setting of an IoT device even if they are in a far away place. For example you can turn on/off the smart lights from your smartphone when you are away from home.

Technical Challenges

Although smart contracts fulfil many conditions related to data/device management, they have some drawbacks, based on basic design principles of blockchain technology.

• The data stored on smart contracts can be viewed by everyone present on the public blockchain as there is no read access restriction. One cannot  store private data on smart contracts.
• The programming languages and machines have a lot of limitations, different programming language is needed for different blockchain technology. The interrelationship between blockchain and block building still needs to be developed.
• There are no rules and regulations governing smart contracts. There are questions about how would the government regulate and tax smart contract transactions, and which tax brackets would they fall under.

Use Cases

Financial inclusion 

Many financial firms use smart contracts to make their transactions more cost and time efficient, eliminating third parties. Use cases of smart contracts in the financial world are as follows :

• Derivative Market : Use of smart contracts in derivative transactions allows users to trade in an easier and customisable manner while having full control of their assets and positions. The payment can be automated and executed after certain requirements are met.
• Banks and financial Institutions : Banks have made KYC mandatory across the globe in all the financial activities of lending, borrowing and trading. Obtaining customer information is tedious but also necessary to prevent fraud. A smart contract helps the  bank streamline this process by easily verifying the customer identity through records maintained on the blockchain and help trace down the customers credit history.
• Decentralized Finance (DeFi) : Smart Contracts are implemented by the Decentralized Application (DApps) to facilitate peer-to-peer transactions. All the transactions are recorded on the blockchain which are easy to be audited and traced. It helps instil trust in people as the transactions are secure and transparent.

Identity management

Security of Identities are very important in IoT devices, as smart contracts are connected to several online services. Smart contracts help in forming a digital identity by storing components of digital assets and data. Smart contracts may contain credit scores that lenders generally use to measure risks. For example MyEarth is a decentralized management system which allows users to control their digital identity data.

Property records

Blockchain provides tokenization of assets, through which you can transfer the ownership rights of physical assets into tokens, lowering the barriers to entry for real estate investment. There have been several successful endeavours in tokenizing real estate assets via platforms like RealIT and SolidBlock that fuse blockchain and real estate.

While purchasing a property there are a lot of hidden costs involved which can be eliminated by automatically executing smart contracts that are free of all the hidden costs. Tokenizing a property via smart contracts eliminates the need for manually filling all the documents saving time and money.

Challenges in Smart Contract Developments

Security vulnerabilities

Each technology has its pros and cons, the major challenge faced in smart contracts developments is they have several  security vulnerabilities. The main challenge is the possibility of coding errors or bugs in the smart contracts, which would lead to unexpected behaviour and cause troubles in the transactions.

The irreversible nature of transactions on blockchain technology means vulnerabilities in the smart contract code can be exploited by malicious users, leading to fraudulent activities. Smart contracts are very complex, thus the coding involved is also complex which may sometimes not be proper as humans are prone to errors.

Limited functionality

Smart contracts are powerful but still lack the ability to interact with external data sources without the help of offchain resources, which limits it from being fully automated. Smart contracts are complex arrangements and sometimes exceed the capabilities of current smart contract platforms.

Oracles one of the weakest point in smart contracts, are susceptible to manipulation by hackers who once inside the system, can alter the behaviour of the smart contract with which the Oracle is linked. As the technology continues to evolve, addressing these limitations will be crucial in expanding the scope of smart contract adoption.

Adoption barriers

Many companies have still not adopted the use of smart contracts in their businesses because they believe no code is perfect and it is still unclear on how the governments will handle these contracts in terms of taxation and other forms of regulation. There are a lot of loopholes through which data cannot stay protected as promised by the smart contract technology, anyone can gain access to the system and perform malicious actions.

Regulatory Environment and Future Outlook

The legal rules and laws for smart contracts still have to be made, there is no clarity on how will these contracts be taxed and regulated by the central governments, without the implication of proper law and regulation there is a lot of uncertainty which hinders its mass adoption.

Looking into the future the outlook for smart contracts seems promising especially as regulatory frameworks become clearer and more accommodating. As the technology matures and gains wider acceptance smart contracts have the potential to revolutionize various industries by automating and streamlining complex processes.

The future of smart contracts is likely to be shaped by a combination of technological advancements regulatory developments, and industry adoption, paving the way for their integration into mainstream business practices.

Conclusion

Smart contracts have the potential to transform various industries by automating and streamlining complex processes. The latest developments in smart contract technology which include new programming languages like Move and Plutus as well as scaling solutions such as state channels and layer 2 protocols demonstrate the ongoing evolution of this technology making them more efficient and secure.

There are a few challenges which still need to be addressed such as security vulnerabilities and limited functionality. These challenges cause hindrances in the mass adoption of smart contract technology. Also there is no proper rule or law in place for smart contracts, making organizations a bit hesitant to adopt the technology.

The future of smart contracts is promising and it is most likely going to become the most widely used technology. It will change the way we carry out transactions and make agreements which can have positive results despite the challenges it currently poses.