Smart contract platforms: overview
A few years ago, Ethereum stood unrivaled as the only platform that could host smart contracts. Today, its transaction fees and delays cause outrage. Competition is growing, and rising stars like Polkadot are making headlines. To understand which Ethereum killers can eclipse the giant, you need to know how smart contracts work.
Over the next few weeks, we will post in-depth reviews of popular smart contract platforms. Let’s take a deep dive into the basics — the logic and technology for deploying smart contracts.
What are smart contracts?
Smart contracts work like robotic intermediaries or vending machines. These self-executing agreements exist on a special layer of blockchain — its environment for user interactions and transactions. Every smart contract is a piece of computer code that sits at a unique blockchain address and automates specific actions.
These agreements are vital to the crypto marketplace as they add trustlessness to blockchains. Before the advent of Ethereum smart contracts, users did not have any mechanisms that would guarantee honesty.
EVM as first smart contract environment
The Ethereum virtual machine (EVM) made self-executing agreements possible in 2015. You can think of it as a computer or information processor running the transaction code. It is completely self-sufficient. Ethereum uses Solidity, an object-oriented programming language.
Today, EVM is not the only foundation for smart contracts. DeFi developers can rely on other systems and software development kits.
For example, Cardano has its own code — most contracts on this blockchain are written in Plutus. Hyperledger Fabric, which was developed by the Linux Foundation, lets smart contract developers use Go, Node. js, and other programming languages.
How do smart contracts work?
Let’s begin with a simple example. Suppose Jack wants to buy a vehicle from Mark. They generate an agreement via a smart contract on the Ethereum blockchain. This saves them time and money. The contract conditions may contain parameters like
“WHEN Jack pays Mark 350 Ether, THEN Jack will receive ownership of the vehicle”.
As this agreement is unalterable, Jack has no qualms about releasing funds. He will get the vehicle once the payment is made. Without a smart contract platform, the counterparties would have to involve a bank and a lawyer. Now, how would such a platform facilitate crypto transfers?
Basic smart contract in crypto
Suppose a stranger offers to buy 2 BTC from you for fiat. For this transaction to take place, you have to trust them to follow up with the deal. Nothing guarantees they will wire the money after getting your crypto. If something goes wrong, there is no recourse.
A good smart contract platform will make your interaction completely trustless. It will become fully automatic, and the buyer won’t get your BTC unless they keep their side of the deal. The if/when..., then... logic will protect you.
Smart contract platforms can accommodate a plethora of more complex transactions. For example, a contract may be programmed to split a payment it receives between you and another user.
Smart sontracts on Bitcoin vs. Ethereum
Although the pioneering blockchain also supports smart contracts, they are far less sophisticated. What makes Ethereum superior is that automatic agreements are an organic part of its architecture. They interact with each other in a variety of ways and can form fully-fledged applications.
Making trust implicit
Let’s digress a little. It is a well-known fact that blockchains are decentralized, and so are smart contracts. But what exactly does this mean? It all comes down to the distributed ledger technology and consensus mechanism.
Decentralization refers to the absence of a central party controlling the financial ecosystem. Blockchains may not be altered or managed by any individual or entity like a bank, government, or broker. These are databases shared and run by a multitude of computers (nodes). Every node runs a copy of the blockchain and verifies the validity of its blocks.
Technically, this makes the blockchain and smart contracts virtually impenetrable for hackers. An attack would require hacking over 50% of all nodes. Thus, the parties to any automatically executed contract can have confidence in it.
Other advantages of smart contract platforms
The revolutionizing of finance via the implicit trust is only one of the benefits. Smart contract platforms also automate tasks and host Dapps (decentralized applications). For example, developers can use smart contracts to automate loans and staking.
Smart contracts and crypto lending
Unlike standard loans, crypto lending can be fully automated. Lenders can make a profit passively — they deposit funds to a pool that manages them automatically and pays interest. Today, this industry offers collateralized loans and flash loans. The latter, which are mainly used for asset arbitrage, are repaid within seconds.
Smart contracts ensure fairness. If the borrower fails to repay their debt, the transaction is reversed as if the loan had never been taken.
Smart contracts and decentralised applications (Dapps)
Users can interact with smart contracts through apps built on blockchains. Their functions are summoned through transactions. Basically, Dapps are complete computer programs that wrap smart contracts in the front-end.
For example, MakerDAO is a decentralized credit service built on the Ethereum blockchain. Its users can deposit ETH to borrow the Dai stablecoins. If the collateral value drops below 66% of the loan amount, it is liquidated, and the system imposes a penalty.
Bitcoin was, in essence, the first Dapp. It is an open-source platform reliant on a computer network, and everything related to BTC is public. Anyone can mine, store, and transfer the cryptocurrency. Bitcoins are minted by the PoW algorithm, which may not be altered without consent from the majority of users. Like all Dapps, Bitcoin is free from external control and interference.
Uses of smart contract platforms
The utility of smart contracts is not limited to financial transactions. They can facilitate any type of exchange within a supply chain, even the transfer of goods around the world. The opportunities are literally infinite. For example, users can
- trade finance
- buy and sell services
- perform credit authorization
- provide insurance
- record and transfer healthcare data
- launch crowdfunding agreements for new apps (ICOs)
Elections through smart contracts platforms
At the state level, smart contracts platforms can be used to build highly secure, trustless voting systems. Follow My Vote, software for voting fraud prevention, is based on a simple principle. All votes get recorded on the blockchain after formal verification, which makes them tamper-proof. Each of the candidates has their own address. Once the voting is over, the contract sends a token to the winner’s wallet.
Smart contract payroll
Businesses can execute smart contracts instead of dealing with conventional systems. For instance, a company may set up an agreement stipulating WHEN the date is 12.01.22, the Company sends its employee James 2 ETH. This way, James will always be paid on time automatically, without any effort from his payroll manager. Here is an example.
Popular smart contract platforms
The Ethereum blockchain ecosystem has the most smart contracts and Dapps. The total market cap of the hub has surpassed $366 billion dollars. None of the rivals come close in terms of scope and popularity.
At the moment, though, the network suffers from high gas fees and slow transaction speed due to congestion. The Ethereum Foundation is gradually unrolling its ETH 2.0 update, whose full release is expected in 2023. Ethereum’s throughput rate is expected to soar from 12-15 TPS to 15,000 TPS. Other blockchain networks address its various constraints in their own ways.
Alternative smart contract platforms
Here are some of the existing blockchain platforms known as Ethereum killers. Each of them uses its own smart contract language.
- Binance Smart Chain
- Hyperledger Fabric
Binance Smart Chain is a Web3 system based on BEP20 tokens. It was specially created for smart contracts in order to accelerate transactions. BSC is also EVM-compatible, so it supports Ethereum’s online tools.
EOS.IO is another popular smart contract platform with an ambitious goal. It is a highly scalable open-source project aiming to eliminate transaction fees. According to the developers, it will be able to process millions of transactions per second. The distinctive features of EOS.IO are the C++ language and easy post-deployment upgrades.
Unlike Ethereum, all of these other DeFi platforms are relatively fast. For example, the Polkadot open network can handle 1,000 TPS, while EOS boasts around 4,000 TPS. High throughput translates into enhanced convenience and lower costs. Despite lower market capitalization, Ethereum’s rivals are growing vigorously.
Some environments support multiple blockchains and virtual machines. For example, Astar connects EVM to WASM. The latter is a separate cross-platform instruction supporting different languages. This network will work with decentralized applications, NFTs and DAO.
Smart contracts and data protection laws
One of the biggest challenges for smart contract platforms is compliance. Their logic clashes with the existing data protection norms. For example, immutability contradicts the right to be forgotten stipulated by the European General Data Protection Regulation (GDPR). The EU regulation also includes the right to revoke consent and the right to human intervention, which are both impossible.
Future of smart contract development
Smart contracts platforms can take transactions to a new level, making them trustless and automatic. Unlike conventional agreements, they exist in the digital space and eliminate the middleman. Large companies, small businesses, and individuals can all benefit from efficient, cheaper, faster, and more reliable contracts.
Many industries, from finance to healthcare, recognize the pros of smart contract development. While Ethereum boasts the biggest number of contracts and the highest market cap, the competition is growing stronger and more diverse. ICOs are all the rage, the DeFi market is booming, and developers are constantly pushing the envelope for Dapps and other blockchain projects.
This industry is yet to reconcile immutability with legal frameworks. Nevertheless, there is ample evidence of success, and the future of smart contract ecosystems looks bright. They can make the world a better place by eliminating delays, preventing fraud, and reducing the costs of transactions. Next week, we will start our series of articles about the biggest smart contract platforms, so stay tuned!