What Are Smart Contracts?

Thursday, Jan 5, 2023

Smart contracts are programs stored on a blockchain that automatically execute all or parts of an agreement once predetermined conditions are met. Smart contracts remove the need for a trusted third-party and are irreversible once settlement assurance is reached.

The technical definition for “smart contracts” has a little too much jargon for the average consumer, but that’s because there are many legal questions that will require a precise definition.

For the layman, it’s easier to think of a smart contract as any traditional contract or agreement converted into computer code and settled on a blockchain. We can make almost any type of financial instrument or agreement between two parties into a smart contract.

History of Smart Contracts

Smart contracts were first proposed in 1996 by cryptographer Nick Szabo while a graduate student at the University of Washington. In his article “Smart Contracts: Building Blocks for Digital Markets” Szabo proposed the digital evolution of contracts and speculated about the nature of the different types of instruments we would first see developed as an online smart contract.

Akesmos implemented smart contracts using Szabo’s approach as early as 2002, but widespread smart contract adoption began with Ethereum in 2015.

Ethereum’s ecosystem has grown significantly since then. Despite the wide array of use cases, Bitcoin has remained the market leader in digital currencies. Mintlayer will bridge the gap between DeFi’s potential and the most trusted and widely adopted digital currency.

Traditional Contracts vs. Smart Contracts

A traditional contract establishes terms of an agreement between two or more parties, and is endorsed by those parties.

People use contracts for purchases, loans, leases, insurance, liens, bonding and thousands of other use cases every day. Lawyers draft and facilitate these agreements.

We can use smart contracts for practically all existing use cases where we currently employ traditional contracts. Rather than relying on paper, stipulations are encoded into a program and secured by the consensus mechanisms of a blockchain. Predetermined wallets are associated with different aspects of the contract to track payments, disbursements, escrow, etc.

Mintlayer will allow all types of existing smart contracts to be programmed onto the platform. This will reduce the path for Bitcoin holders to participate in decentralized finance.

Smart Contract Functionality

Smart contracts not only establish agreements, they also help enforce them.

For example, a lease agreement could monitor monthly payments and terminate itself or penalize the lessee if they do not make the payments in time.

For a loan, we can store collateral in a wallet. When the loan matures, the collateral is released back to the creditor, but if the contract is breached, the collateral is released to the debtor.

Mintlayer plans to improve smart contracts in a number of ways. By integrating with the lightning network, certain transactions will be much more affordable. We also plan on integrating privacy protocols and developing Dapps that make creating things like security tokens simpler and more accessible.

Features of Smart Contracts

In contrast to traditional contracts, smart contracts are enforced by computer code rather than a third party (like a bank or a court system). They are not yet considered legal contracts.

Smart contracts are decentralized across a p2p network, which prevents unauthorized alterations.

Smart Contracts are Immutable

A smart contract’s parameters cannot be altered once it is implemented on the blockchain. Once published, no one can change its code behind your back.

Smart Contracts are Irreversible

In principle, smart contracts are irreversible, which help mitigate conventional breaches of contract that parties with a stronger position have been able to employ without a penalty. This increases fairness in the face of power imbalances, and secures both parties from perfidy.

Smart Contracts are Trustless

With the introduction of smart contracts, it is possible to create contracts without the facilitation of a trusted third-party. This eliminates potential conflicts of interest and the cost of intermediation.

Existing Issues With Smart Contracts

In spite of smart contracts' many advantages and potential, the technology is still evolving and some challenges remain.

  • Human error: Smart contracts are vulnerable to hacks, coding errors, and bugs. Humans code smart contracts, so they are subject to human error.
  • 51% Attacks: Smart contracts are vulnerable to the inherent vulnerabilities of the blockchain such as 51% attacks.
  • Difficult to amend: The immutability of smart contracts can be a pro and a con. It is necessary to code any change as a newly created transaction, and an existing contract can complicate amendments, even if both parties agree on a change.
  • High barrier of entry: At this time, generating a smart contract requires writing hundreds or even thousands of lines of code. Inexperienced programmers are more likely to make mistakes when writing computer code.

Mintlayer has made our best efforts in making sure our codebase is as clean, familiar, and elegant as possible. We have attempted to shorten the learning curve where possible by studying the success and mistakes of existing open source projects.

One of our future goals is to develop Dapps that make different types of smart contracts more accessible to the average person. By codifying and adhering to the best practices and existing legislation for specific use cases, we foresee a time when users can create certain types of smart contracts on Mintlayer using a mobile app with a simple and intuitive user interface.

The Future of Smart Contracts

As the different technologies progress and legislation codifies regulation around cryptocurrency, smart contracts will become more useful in existing financial and legal use cases.

This will lead to even more novel and interesting ways for users to take advantage of smart contracts, while also making them more accessible to the average person.

Mintlayer will increase the usage of smart contracts by introducing the capacity to use smart contracts to existing Bitcoin holders, and also by promoting the development of Dapps that make smart contracts more accessible to the average person.

The sky’s the limit for decentralized finance and smart contracts. We hope that Mintlayer can be your blimp!