Smart contracts

What a smart contract is and how it works

A smart contract is a digital contract that is automatically executed when certain conditions are met. This type of contract exists exclusively in virtual space and is based on blockchain technology. Smart contracts ensure reliable and transparent execution of agreements between parties without the need for intermediaries.

A smart contract is based on a simple principle: if pre-defined conditions are met, a certain action is performed. This allows for the automation of many processes and ensures that contractual obligations are fulfilled regardless of the human factor. For example, in the case of an agreement to transfer funds when a job is performed, a smart contract will automatically transfer money to the contractor's account as soon as the job is completed and confirmed.

The main advantages of smart contracts include:

• Automation: Eliminate middlemen and automate contract fulfilment.

• Transparency and security: All transactions are recorded on the blockchain, ensuring immutability and transparency.

• Efficiency: Reduced time and costs associated with contract fulfilment.

Types of smart contracts 

Smart contracts, being a universal tool for automating the fulfilment of conditions, are used in various spheres and have many varieties depending on their functionality and purpose of use. In this article we will consider the main types of smart contracts, their features and examples of application.

Simple smart contracts

Simple smart contracts are basic contracts that perform one or more simple tasks such as sending and receiving tokens, checking conditions, and managing balances.

Examples:

• ERC-20 and ERC-721 tokens: Contracts that manage the issuance, transfer and accounting of tokens.

• Simple transfers: Contracts that provide automatic transfers of funds when certain conditions are met.

Multisignature smart contracts (Multisignature)

Multi-signature contracts require multiple signatures to execute a transaction. This increases security and control over funds, as one party cannot solely initiate a transaction.

Examples:

• Fund Management: Contracts used to manage funds by an organisation or group of individuals, where the consent of the majority of participants is required to execute the transaction.

• Joint Accounts: Contracts to manage joint accounts where funds can only be used if all parties agree.

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Smart contracts for decentralised finance (DeFi)

These contracts are used in various applications of decentralised finance such as lending, borrowing, token exchange and asset management.

Examples:

• Lending and Borrowing: Contracts that automatically manage the lending and interest processes, such as Aave or Compound.

• Decentralised exchanges (DEX): Contracts to exchange tokens without intermediaries, such as Uniswap or SushiSwap.

• Stablecoins: Contracts that maintain a stable value for tokens tied to fiat currencies, such as MakerDAO's DAI.

Insurance smart contracts

These contracts automate the process of making, fulfilling and paying out insurance policies, ensuring transparency and efficiency.

Examples:

• Weather insurance contracts: Contracts that pay compensation when certain weather conditions occur, such as protecting farmers against drought or floods.

• Health Insurance: Contracts that automate the process of health insurance reimbursement.

Hybrid smart contracts

Hybrid smart contracts combine elements of both decentralised and centralised systems. They can interact with external data through oracles and use traditional management techniques.

Examples:

• Predictive markets: Contracts that use oracles to obtain data from external sources, such as the results of sporting events or political elections.

• Corporate contracts: Contracts that use external data and processes to manage corporate assets and liabilities.

DAO (Decentralised Autonomous Organisations)

Contracts that govern decentralised autonomous organisations. DAOs allow users to participate in the management of the organisation through voting and proposals, automating the execution of decisions.

Examples:

• Project Management: Contracts that allow participants to propose and vote on initiatives and resource allocation.

• Investment funds: Contracts that manage collective investments where participants vote on investment decisions.

Application of smart contracts

Smart contracts are widely used in various industries:

• Financial Services: Automating payments, settlements and derivative contracts.

• Real Estate: Property rental and sales management, including automated title management.

• Logistics and Supply Chain Management: Tracking and managing the delivery of goods, automating delivery terms.

• Legal services: Creation and execution of legally binding contracts.

• Gaming industry: Creating decentralised games and gaming assets.

Basic aspects of writing smart contracts

When it comes to how to write smart contracts, it's important to realise that this process requires some programming skills and knowledge of blockchain principles. Let's start with the basic steps:

• Defining the terms of the contract: The first step is to clearly define the conditions and scenarios under which the contract will be performed. This includes all possible conditions and actions to be performed.

• Choosing a platform: Currently, the most popular platforms for writing smart contracts are Ethereum and Binance Smart Chain. Both platforms support the Solidity programming language, which is specifically designed for creating smart contracts.

• Programming the contract: Using the Solidity language, the programmer creates the code that describes the logic and terms of the contract. This is a key step, as the correctness of the code depends on the correctness of the smart contract.

• Testing: Before a contract can be deployed on the blockchain, it must be thoroughly tested on specialised test networks to ensure that there are no errors. This is an important step, as errors in the code can lead to serious problems once the contract is deployed.

• Blockchain deployment: After successful testing, the contract is deployed to the main blockchain network. This is done using specialised tools such as Truffle, Remix IDE or Hardhat.

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Smart contracts are a powerful tool that can significantly change many aspects of our lives. They provide the transparency, security, and efficiency that are essential in today's digital world. Understanding how to write smart contracts is an important skill for any developer working with blockchain technologies. By following the steps above, you will be able to create your own smart contracts that will perform reliably in decentralised networks.