SMART

CONTRACTS
 WHAT ARE SMART
CONTRACTS?
• A smart contract is a digital agreement signed and
stored on a blockchain network that executes
automatically when the contract’s terms and
conditions (T&C) are met
• The T&C is written in blockchain-specific
programming languages like Solidity.
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HISTORY OF SMART
CONTRACTS
• Nick Szabo, a computer scientist who developed a virtual
currency dubbed “Bit Gold” in 1998, was the first to
propose smart contracts in 1994.
• Szabo characterized smart contracts as digital transaction
mechanisms that implement a contract’s terms.
• Many predictions made by Szabo in his paper are now a
part of our daily lives in ways that precede blockchain
technology. However, this idea couldn’t be implemented
because the necessary technology, primarily the
distributed ledger, did not exist then.
 EXAMPLE OF A SMART CONTRACT:
AUTOMATED LOAN REPAYMENT
Scenario:
• A user has taken out a loan from a bank, and the terms of the loan
agreement are encoded into a smart contract.
Smart Contract Condition and Action:
• Condition: On the 1st of each month.
• Action: Deduct the loan installment amount from the user's bank account.
 WORKING OF SMART CONTRACT 5

1. Creation of Smart Contract: The bank and the user agree to the terms of the loan, including the
repayment schedule, interest rate, and loan amount. These terms are then translated into a smart
contract using a programming language like Solidity.
2. Deployment on Blockchain: The smart contract is deployed on a blockchain platform, such as
Ethereum, where it is securely stored and accessible to both parties.
3. Triggering Condition: The smart contract includes a condition that specifies the trigger event for
repayment, in this case, the 1st day of each month.
4. Automatic Execution: When the 1st day of the month arrives, the smart contract automatically
executes the predefined action, which is to deduct the installment amount from the user's bank
account.
5. Verification and Record Keeping: The transaction is recorded on the blockchain, providing a
transparent and immutable record of the repayment. Both the bank and the user can verify the
transaction and its details.
6. Repeat Process: This process continues each month until the loan is fully repaid, with the smart
contract autonomously handling the repayment process according to the predefined terms.
 TYPES OF SMART
CONTRACTS

1. Smart Legal Contracts

2. Decentralized Autonomous Organizations (DAOs)
3. Application Logic Contracts (ALCs).
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SMART LEGAL
CONTRACTS
• Smart contracts are guaranteed by law.
• They adhere to the structure of legal contracts:
“If this happens, and then this will happen.”
• As smart contracts reside on blockchain and are
unchangeable, judicial or legal smart contracts
offer greater transparency than traditional
documents among contracting entities.
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DECENTRALIZED AUTONOMOUS
ORGANIZATION

• DAOs are democratic groups governed by a smart

contract that confers them with voting rights.
• A DAO serves as a blockchain-governed
organization with a shared objective that is
collectively controlled.
• No executive or president exists. Instead,
blockchain-based tenets embedded within the
contract’s code regulate how the organization
functions and funds are allocated.
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APPLICATION LOGIC
CONTRACTS
• ALCs, or application logic contracts, consist of
application-based code that typically remains
synced with various other blockchain contracts.
• It enables interactions between various devices,
like the Internet of Things (IoT) or blockchain
integration.
• Unlike the other types of smart contracts, these
are not signed between humans or organizations
but between machines and other contracts.
USES OF SMART CONTRACTS
 ADVANTAGES
1. Single source of truth
Individuals have the same data at all times, which reduces the
likelihood of contract clause exploitation. This enhances trust and
safety because contract-related information is accessible throughout
the duration of the contract. Additionally, transactions are replicated so
that all involved parties have a copy.

2. Reduction in human effort

Smart contracts don’t need third-party verification or human oversight.
This provides participants autonomy and independence, particularly in
the case of DAO. This intrinsic characteristic of smart contracts offers
additional benefits, including cost savings and faster processes.
3. Prevention of errors
A fundamental prerequisite for any contract is that every term and condition is
recorded in explicit detail. An omission may result in serious issues in the future,
including disproportionate penalties and legal complexities. Automated smart contracts
avoid form-filling errors. This is one of its greatest advantages.

4. Zero-trust by default
The entire framework of smart contracts is a step beyond conventional mechanisms.
This implies that there’s no need to rely on the trustworthy conduct of other parties
during a transaction. A transaction or exchange does not necessitate faith as a
fundamental component, consistent with zero-trust security standards. Since smart
contracts operate on a decentralized network, every aspect of the network is more open,
fair, and equitable, with no risk of privilege creep.

5. Built-in backup
These contracts capture essential transactional details. Therefore, whenever your data is
used in a contract, it is stored indefinitely for future reference. In an instance of data
loss, it is simple to retrieve these properties.
 DISADVANTAGES
1. Rigidity and inconsistent support
Modifying smart contract protocols is nearly impossible, and fixing
code errors can be costly and time-consuming. Even if smart contracts
conform to the laws of different countries, it might be tough to
guarantee that they are adhered to globally.

2. Difficulty in capturing unquantifiable data

For businesses with quantifiable data, such as finance and agriculture,
it is relatively simple to put together smart contracts. However, not all
industries use quantifiable metrics, like scenarios where creative work
has to be evaluated.
3. Conflict with GDPR
The General Data Protection Regulation (GDPR) guarantees the right to be forgotten
by its citizens. They can request that digital data about them be deleted. Nevertheless,
if a digital legal contract binds an individual, it cannot be erased or redacted.

4. Skills shortage
The creation of smart contracts demands expertise in software engineering. Smart
contract development is distinct from traditional software development in that it
requires coders with organizational expertise and comprehension of non-traditional
programming languages such as Solidity. These skills are hard to come by.

5. Scalability Issues
Finally, there is the question of magnitude and scale. Visa can currently process
approximately 24,000 transactions per second. According to Worldcoin’s 2023
update, Ethereum, the world’s biggest blockchain for smart contracts, can only
manage 30 transactions per second.
CONCLUSION
• In conclusion, smart contracts represent a significant advancement in
contract technology, offering unparalleled automation, transparency,
and security.
• As we've explored, smart contracts come in various forms, including
smart legal contracts, decentralized autonomous organizations
(DAOs), and application logic contracts (ALCs), each serving unique
purposes across different industries.
• From revolutionizing financial transactions and supply chain
management to enabling decentralized governance and digital
identity verification, the potential applications of smart contracts are
vast and diverse.
THANK
YOU