What Are Smart Contracts in Blockchain? A Beginner’s Guide

Blockchain technology has disrupted many industries in the last decade, enabling new decentralized models powered by its innate security, transparency and automation capabilities. One of its most transformational applications is smart contracts – self-executing code on the blockchain enabling automation without intermediaries.

• What exactly are smart contracts and how they work
• The history and origins of smart contract development
• Key benefits and use cases of blockchain smart contracts
• How smart contracts differ from traditional legal contracts
• Technical components and architecture of smart contracts
• Popular blockchain platforms for developing smart contracts like Ethereum
• Tools, languages and frameworks used to code smart contracts
• Major challenges and limitations that need resolution
• The future outlook for adoption and innovation with smart contracts

Let’s get started and understand why smart contracts are positioned to revolutionize many industries in the coming years!

What Are Smart Contracts? A Simple Explanation

A smart contract is a self-executing agreement encoded into lines of code that is stored and replicated across a blockchain network. The terms of the contract between the transacting parties are written into code using programming languages like Solidity.

When predetermined conditions are fulfilled, the smart contract executes automatically to deliver the business logic and outcomes programmed by its creators. For example, transferring funds from one party to another upon receiving a payment.

Smart contracts allow transactions and agreements between parties to be carried out automatically in a transparent, conflict-free way without requiring a centralized authority. The code controls the execution, and transactions are trackable on the blockchain.

Some key properties of smart contracts include:

• Programmable logic and rules encoded into software
• Execution is automated when conditions are met
• Transactions are trackable on the blockchain
• No central authority required for execution
• Savings in cost and time compared to traditional agreements

The potential for smart contracts to disrupt legal, financial, and many other sectors is derived from these qualities of automation, speed, cost reduction, and decentralization.

A Brief History of Smart Contract Development

While blockchain enabled the realization of smart contracts, the conceptual foundation was laid decades ago. Here is a quick overview of the evolution of smart contract technology:

• 1994 – Computer scientist and legal scholar Nick Szabo first coined the term “smart contract” and discussed the idea extensively.
• 2008 – Szabo’s ideas would influence the development of Bitcoin, the first blockchain network, which laid the groundwork for smart contracts.
• 2013 – Vitalik Buterin proposed Ethereum, the first blockchain and smart contract specific platform.
• 2015 – Ethereum launched, enabling developers to write Turing-complete smart contracts with the Solidity language.
• 2016 – The first major smart contract vulnerability led to the loss of $60 million in the DAO exploit.
• 2020 – DeFi applications using smart contracts for decentralized finance grew exponentially in use.
• 2021 – NFTs powered by smart contracts on Ethereum transform digital art and collectibles.
• 2022 – Multiple scaling solutions are introduced to reduce gas fees and improve smart contract usability.

While still maturing, we are seeing rapid evolution and innovation across smart contract platforms, languages, tooling and applications. Smart contracts are poised for mainstream adoption as blockchain infrastructure improves.

Why Are Smart Contracts Impactful? Key Benefits Explained

Smart contracts unlock game-changing possibilities and benefits compared to traditional paper contracts or digital agreements:

Trustless Execution

Smart contracts remove intermediaries and the need to trust any centralized authority for oversight or processing. Agreements execute automatically based programmed code.

Transparency

All parties can review smart contract code, transactions are visible on the blockchain, and records are tamper-proof. This eliminates ambiguities.

Accuracy

Automated execution eliminates human error, miscommunication or potential fraud in manual contract management. Outcomes are precise.

Savings

Smart contracts minimize fees, overhead costs and delays by removing middlemen. The automation streamlines processes.

Speed

With no manual review required, smart contract transactions complete at much faster speeds measured in seconds or minutes.

Stored on Blockchain

Smart contracts have records permanently written to blockchain ledgers for independent verifiability and auditability.

The combination of these factors allows smart contracts to enable breakthroughs in how business agreements operate across industries.

How Smart Contracts Differ from Traditional Contracts

While smart contracts share similarities with conventional legal contracts, there are some key differences:

Automated Execution

Traditional contracts rely on involved parties to interpret terms and manually fulfill obligations. Smart contracts self-execute based programmed code.

Speed

Changes to traditional contracts require review cycles and physical signatures. Smart contracts enable near real-time modifications.

Enforcement

Courts are required to settle disputes with traditional contracts. Smart contracts are enforced by immutable code and blockchain data.

Storage

Paper contracts must be physically stored and managed. Smart contracts exist digitally on blockchain.

Data Privacy

Standard contracts maintain confidentiality. Smart contracts transactions are publically visible on public blockchains.

Programming Skills

Legal writing abilities are required for typical contracts. Coding skills are needed to create smart contracts.

While they have differences, smart contracts and standard contracts can complement each other. Hybrid models blending both methods are popular for complex agreements.

Technical Components of a Smart Contract

Under the hood, here are the key technical pieces that make up a smart contract:

Contract Code

The core program containing data variables, business logic, executable functions defining contract behavior. Written in a language like Solidity.

Application Binary Interface (ABI)

The ABI is the interface for interacting with the smart contract from external applications. It defines how to pass data into the contract.

Bytecode

Bytecode is what the compiled smart contract code gets converted into that is then executed by the blockchain virtual machine.

Blockchain Network

The distributed blockchain network provides the decentralized infrastructure for deploying, running, and recording smart contracts.

State Storage

Data variables that track the current state of the smart contract are stored persistently in blockchain network nodes.

Events

Events are signals emitted by the smart contract code to indicate something has happened, like a transfer being completed. DApps can listen for events.

Functions

Functions contain the logic of the smart contract. They execute based on user inputs and contract state to perform operations.

The exact implementation details vary by blockchain, but these are the primary components developers work with when coding smart contracts.

Popular Blockchain Platforms for Smart Contracts

While most blockchains have some smart contract capabilities, here are some of the most popular and advanced platforms used for developing robust smart contract applications:

Ethereum

The second largest blockchain by market cap after Bitcoin, Ethereum was the first to allow Turing-complete smart contracts. It provides a powerful programming language in Solidity and an EVM for contract execution. Over 3000 DApps have been built on Ethereum smart contracts.

Polygon

Polygon is a Layer 2 scaling framework that works with Ethereum to provide faster and lower cost transactions for Ethereum-compatible smart contracts and DApps without compromising security.

Solana

Solana is a high speed open source blockchain supporting the Rust programming language for smart contract development. It uses a “proof of history” consensus and claims to offer 65,000 TPS throughput.

Cardano

Cardano is an open source proof-of-stake blockchain network designed for secure smart contracts. It uses the Plutus language purpose built for writing Cardano smart contracts.

Algorand

Algorand is a permissionless pure proof-of-stake blockchain and ecosystem for building decentralized applications and smart contracts. It uses TEAL, a low-level language for smart contracts.

Cosmos

Cosmos is focused on solving blockchain interoperability through its Cosmos SDK and Tendermint consensus. Its ecosystem supports multiple languages for smart contract

Solidity – The flagship language for writing Ethereum smart contracts. Similar to JavaScript.

Vyper – A Python-like language also for Ethereum smart contracts focused on security.

Rust – Supported by blockchains like Solana, Polkadot, and Dfinity for its speed and efficiency.

Go – Created by Google, clean and simple to use. Used by Cosmos SDK and VeChain.

C++ – A widely adopted object-oriented language. Utilized by EOS smart contracts.

Haskell – Functional programming language leveraged by the Cardano blockchain.

JavaScript – Popular language adapted by networks like Near Protocol for writing contracts.

Python – General purpose language used to code some blockchain smart contracts.

The optimal language depends on specific blockchain platform, complexity needs, and developer familiarity.

Popular Tools and Frameworks for Smart Contracts

Here are some commonly used tools and frameworks for developing, testing and deploying smart contracts:

• Truffle – The most popular development framework for Ethereum smart contracts. Provides compilation, linking, deployment and binary management.
• Embark – Another framework for developing and testing Ethereum smart contracts with JavaScript. Has integrations with Ethers.js and web3.js.
• Hardhat – An Ethereum development environment for compiling, deploying, and testing smart contracts. Focuses on usability.
• OpenZeppelin – Provides a library of secure smart contract modules, tests, and auditing services. Popular for contract security.
• Ganache – A tool that enables developing and testing smart contracts locally on a private blockchain instance before mainnet deployment.
• Remix IDE – Web and desktop IDE developed by the Ethereum Foundation for smart contract development. Has integrations with MetaMask and other wallets.
• Ethers.js – Allows interaction with Ethereum smart contracts from JavaScript and TypeScript web applications. Handles ABI and bytecode interactions.

Key Challenges for Smart Contract Adoption

While smart contract technology shows immense promise, there remain limitations needing solutions before achieving mass adoption:

• Scalability – Blockchain networks need greater transaction throughput for smart contracts with lower latency.
• Interoperability – There should be seamless composability between smart contracts on different chains.
• Security – High profile smart contract exploits have undermined confidence. Rigorous auditing and formal verification needed.
• Data Feeds – Smart contracts rely on external data inputs (“oracles”) needing decentralization and reliability.
• Upgradeability – Upgrading complex smart contract logic remains challenging after deployment.
• Privacy – Public blockchains reveal all transaction details, unsuitable for contracts requiring privacy.
• Usability – Current developer tools and languages limit accessibility to a small group of experts.
• Compliance – Aligning contracts across legal jurisdictions for arbitration and regulation is complex.
• User Experience – Smoothly integrating smart contract processes into client applications requires polish.

Continuing blockchain evolution and focused research addressing these limitations can enable smart contracts to fulfill their paradigm-shifting potential.

The Future of Smart Contracts

Here are several predictions for where the smart contract sector is headed in coming years:

• Seamless scaling solutions will be implemented leading to massively higher transaction throughput for networks like Ethereum. This will expand possibilities for smart contract capabilities and performance.
• Cross-chain interoperability will improve through protocols like Polkadot and Cosmos. Smart contracts will securely interact across different blockchains.
• A vibrant ecosystem of oracles like Chainlink will emerge to provide reliable real-world data to smart contracts in a decentralized manner.
• New specialized blockchains optimized for confidential smart contracts like Secret Network will provide privacy and programmability.
• Languages and tooling will continue maturing to make smart contract development accessible to a wider audience beyond just blockchain developers.
• The open source community will build a robust stack of reusable, community-audited smart contract modules and templates for every application.
• Decentralized storage innovations will complement smart contract growth enabling off-chain data storage and retrieval.
• Enterprise adoption will accelerate as companies utilize private blockchains to streamline business processes with industry-specific smart contracts.

The next decade will witness smart contracts catalyze transformation across finance, law, trade, government, health, culture, and many other domains. An entire parallel world of blockchain-based agreements and value exchange is being built that will fundamentally reshape these sectors.

Conclusion

We have only begun scratching the surface of possibilities with programmable blockchain smart contracts. Beyond facilitate trustless digital money transfers in the form of cryptocurrencies, smart contracts open up entirely new ways for parties to coordinate, transact, and derisk value. They optimize information exchange, economic incentives, transparency, accuracy, and automation in embedded code.

Yet for all their complexity under the hood, smart contracts represent a profoundly simple, accessible, and liberating concept – enabling people to conduct business and commerce directly without rent-seeking middlemen. Much as information yearns to be free, value too now yearns to flow freely according to transparent, immutable consensual agreements. That future is within reach as smart contract networks continue maturing.