Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without an intermediary's involvement or time loss (source).
Here is a brief review of how smart contracts work:
- Tom wants to send money to Victor
- Tom uses a blockchain as a platform to execute the transaction
- The transaction is recorded on the blockchain
- Every party within the network is notified of the transaction
- If everything is fine, the transaction is approved
- Initialization of the wallet
- Online transfer of the assets
- Victor receives the money
Smart Contracts and Business
When we think of smart contracts, the most common way to explain their use is the transaction model. For example, Tom pays $50 to Victor, and the transaction is executed via a smart contract and stored on the blockchain. Usually, only a gas fee is paid in the transaction process.
Looking at this simple example, we can see how smart contracts are used person-to-person. But what about in business: can smart contracts handle complex business transactions?
- The answer is: “The common logic used to complete a transaction is either ‘If-this-then-that’ or ‘after-this-then-that’. Hence, it’s a logical orchestration between subjects (or things) involved in the transaction.” (source). So yes, they could perform any complexity of process if well designed, developed properly, and linked together to handle a complex chain of events.
Smart Contracts and the Legal Context
Once a smart contract is executed, it triggers a certain action. However, there can be times when an action is performed with malicious intent. Currently, there is not much thought given to the consequences of online transactions and using technology. Many people make them and use technology carelessly, without considering the legal issues behind the scenes.
Right now, there is no legal framework in place for smart contracts, which means we cannot take anyone to court for a mistake in executing a smart contract. The conventional legal system has not yet adapted to the vast field of cryptocurrencies and their potential legal problems. So how would a smart contract work in a legal context?
- The answer is: “Although properly prepared and deployed smart contracts are self-executing, they and their outcomes are not necessarily legally enforceable. To be legally enforceable, a smart contract and the process of “agreeing” to a smart contract must have all the attributes that make traditional contracts enforceable.” (source).
The Technical Limits of Smart Contracts
Smart contracts need to be deployed on a blockchain and extensively tested to ensure their code quality and a high security level. To understand the technical limits, we need to consider the possibilities blockchains offer, as they are the basis for any smart contract implementation.
Then we evaluate what smart contracts can offer. Could we have an all-encompassing smart contract or do we need multiple contracts like a chain?
- The answer is: Smart contracts can be attached to each other like a chain to build complex applications (DApps). Each smart contract handles a specific problem or use case to ensure good functionality and maintainability.
The Future of Smart Contracts
Smart contracts are autonomous, secured, always accurate, free of interruption, trustless, cost-effective, and offer fast performance.
They can support use-cases like record storage, trading activities, supply chains, mortgages, real estate market, employment agreements, copyright protection, healthcare services, government voting, insurance claims, internet of things, and much more.
About Reef Finance & Reef
Reef Finance is building the Reef Chain, a DeFi blockchain built using Substrate Framework. Reef Chain provides high scalability, enabling almost instant low-cost transactions, and supports Solidity and EVM, allowing developers to seamlessly migrate their DApps from Ethereum without any change in the codebase. Our vision is to make DeFi easy for everyone to invest in and build DeFi applications on top of Reef Chain.
Reef Finance has developed a fast, scalable, and EVM-compatible chain for DeFi applications, Reef Chain. Reef Chain is a customized blockchain that allows developers to build DApps or deploy existing projects from Ethereum. Learn about Reef’s recent official news: Website | Twitter | Telegram