Research

Smart Contracts

Messari

Jun 28, 2019 ⋅  2 min read

Written by Max Hinchman

Introduction

Smart contracts are contracts based on code that are self-executing. The first and most widely used blockchain network that provides comprehensive smart contracts is Ethereum. Although the concept of smart contracts was popularized by the Ethereum blockchain in 2014, the concept itself was invented by Nick Szabo in 1994. Nick Szabo stated that smart contracts are, “A set of promises, specified in digital form, including protocols within which the parties perform on these promises.”

The main benefit of smart contracts lies in their trustlessness and elimination of trusted third parties. Developers can write smart contracts to create anything from peer-to-peer exchanges to games involving non-fungible tokens. One prominent use case is crowdfunding that took off with the Initial Coin Offering in 2017 where scarce digital assets were created and distributed to those participated in the sale.

While the number of possibilities for smart contracts are endless, it is still faces significant hurdles to gaining widespread adoption. Mainly, the complexity of smart contracts makes it difficult to execute while maintaining security. As the contracts become much harder for the software to implement, the added ambiguity would create more room for interpretation. More room interpretation means more flaws that can be exploited by malicious players. The famous example of an exploitation of flaw in the code of the smart contract is the DAO. The DAO, or Decentralized Autonomous Organization, was a smart contract created on the Ethereum network was essentially a decentralized venture capital fund. However, users exploited a flaw in the code and took roughly a third of the funds Ethereum.

Suggested Reading

What is a Smart Contract by Sam Zelich

Formalizing and Securing Relationships on Public Networks by Nick Szabo

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