What are Smart Contracts?


A smart contract is an application that runs on a blockchain network. Deployed on public blockchain networks, smart contracts are self-executing and immutable after their signing. The uses of such contracts are limitless, as they can be used to build decentralized exchanges, tokenized assets, games and more. In its construction, smart contracts disrupt not only legal spaces, but financial spaces as well. Since the first smart contract platform, Ethereum, was released in 2015, smart contracts have become the primary focus of innovators in the blockchain arena. In this article, we seek to break down the science behind smart contracts, its uses as they pertain to the present and the future, and how they work as intelligently as they do.

 

Transactions, Contracts, and the Ethereum Virtual Machine

On an abstract level, networks exist to track individuals and the relationships between certain individuals. Networks can be categorized by the type of users that are on the network, the specific types of relationships that set the network apart from other networks, and how the network is maintained. At the time that Bitcoin was released in 2009, peer-to-peer networks for data storage were all the craze. Companies began investing hundreds of millions of dollars into these decentralized networks, making the maintenance of peer-to-peer networks more of a corporate endeavour than a loose army of individuals all across the world. Bitcoin set out to change all of that.

When Satoshi Nakamoto wrote the corresponding whitepaper for Bitcoin, Nakamoto addressed the concerns of centralized network maintenance and security through Proof of Work. The initial Proof of Work concept outlined the Bitcoin network as a network of pseudo-anonymous addresses that could send tokens across the network from one node to the other, secured by anonymous “miners.” Miners are individuals or parties who contribute computing power to encrypt the information on these transactions, add them in blocks on a immutable public ledger (the blockchain), and in return be compensated with a newly created Bitcoin token, hence the Proof of Work.

Numerous other blockchains (that only allowed for the transaction of their respective tokens on their networks) were released after Bitcoin took off. While the blockchain community was deeply involved in initial coin offerings (ICOs) and cryptocurrency trading, members of the community had seemed to have forgotten the original vision of Bitcoin. That is, to create incentivized decentralized peer-to-peer networks. The applications of such networks were limited to tokens, while cloud computing firms were meanwhile taking peer-to-peer networking innovations to new levels in data storage and security.

This was the situation until 2015, when the prodigious Vitalik Buterin released the Ethereum blockchain. The Ethereum blockchain was created as a platform that allowed users to develop customizable, decentralized blockchain applications, made possible through the self-created, solidity programming language and the Ethereum Virtual Machine. Buterin envisioned that his blockchain could be used for transactions and data storage of many kinds, detailing an extensive list of potential applications in his corresponding white paper documentation. This included, but was definitely not limited to: voting systems, financial derivatives, loan systems, supply chain apps, and many others.

On a higher level, Buterin abstracted transactions over the Ethereum blockchain as contracts, or rather, Ethereum smart contracts. In legal terms, a contract is a signed agreement between two parties on an agreed-upon transaction, with potential legal repercussions if the terms are not met. This made sense to Buterin, as he sought to create an environment in which applications that are built upon signable agreements could be ‘insured’ in this way.

 

What makes Smart Contracts smart?

So what makes smart contracts so smart? Aside from the customizability and the digital signatures attached, smart contracts are smart because of their self-executing nature. In the legal paper world, when a contract is signed, the two parties are accountable to fulfill the terms of the agreement on their own. For example, if you sign a contract with a banker about a transfer of paper funds, you or the banker must put effort into physically transferring the funds since dollar bills have no legs of their own and will not move unless you move them yourself. A smart, self-executing contract, in this sense, requires no effort: when you sign a smart contract for transfer of funds, the funds will transfer themselves across the Ethereum network and will record the transaction on the Ethereum blockchain as immutable public data.

 

Smart Contracts and Accountability

The most fascinating part of smart contracts is their potential to create a more accountable global financial ecosystem. In the past century, numerous scandals of fraud have occured when accounting books have been altered, funds have disappeared, and money and vital information have both been stolen en route to their respective destinations. It is extremely difficult to legally protect your transactions when your terms of agreement and contracts are not copied, on burnable paper or when your funds are not accounted for in the books. What Ethereum and smart contracts have opened up are a world of new possibilities and improvements to previous systems of accountability. Seeing as all transactions across the Ethereum blockchain are self-executing and are accounted for on a immutable digital public ledger, all agreements are truly protected with viable proof and evidence of existence. In addition, the accessibility to such financial transaction services, that is, their availability over the world wide web, allows clients who have not had access to traditional financial products and services the chance to be a part of a new digital world economy.

 

Smart Contract Legacy

Since the release of Ethereum and the first implementation of smart contract technology in 2015, subsequent blockchains have followed in Ethereum’s footsteps–to create platforms to develop smart contract based applications. Ethos’ very own Ethos Bedrock was inspired by Ethereum, allowing developers and institutions to build the financial applications of tomorrow. We built our Ethos Universal Wallet application 100% on Ethos Bedrock, with Bedrock being a set of foundational APIs and serving as a blockchain abstraction layer. The impact that smart contracts have had on the blockchain community has been too far-reaching to truly capture. The legacy of smart contracts will live on, much like it has since its conception in 2015.