Smart Contracts: Introduction and Use

Cases
Kiran Amjad

1
Introduction to Smart Contracts
• Smart contracts are self-executing contracts with the terms and conditions of the
agreement directly written into lines of code. These contracts automatically execute when
predefined conditions are met, removing the need for intermediaries such as lawyers or
notaries.
• The concept was introduced by Nick Szabo in 1994, who envisioned these contracts as a
way to extend traditional contract law to the digital world. However, the real application
came with the introduction of blockchain technology, most notably through Ethereum, in
2015.
• A smart contract operates on a blockchain network, where once deployed, the contract’s
code is immutable, meaning it cannot be altered. It runs automatically when conditions
are met, eliminating the need for trust in a central authority.
• The main characteristics of smart contracts are automation, transparency, immutability,
and trustless execution. The code dictates the contract’s terms and actions, and once set, it
can't be changed.
• Smart contracts offer several benefits including faster transactions, reduced administrative
costs, enhanced security due to blockchain’s cryptographic nature, and more reliable
execution without relying on third-party intermediaries.
Key Components of Smart Contracts
•The core of any smart contract is the code that defines the contract’s terms. Written in
programming languages like Solidity (for Ethereum), the code includes conditions, actions,
and triggers that ensure the contract functions as expected.
•These are predefined requirements that must be met for the smart contract to execute.
Conditions might involve the transfer of cryptocurrency, ownership of an asset, or other
actions that are defined in the contract's logic.
•Blockchain serves as the decentralized ledger where smart contracts are deployed. The
blockchain ensures that the contract is tamper-proof and publicly verifiable, providing
transparency for all parties involved.
•Oracles are external data sources that provide off-chain information to a smart contract.
Since blockchains cannot access external data directly, oracles act as bridges, delivering
information like market prices, weather data, or sports scores to trigger the contract’s
actions.
•The decentralized network that hosts and executes smart contracts is known as the
execution environment. For Ethereum, this environment is the Ethereum Virtual Machine
(EVM), which processes and executes smart contracts autonomously across the network.
How Smart Contracts Work
•To create a smart contract, developers write code and deploy it onto a blockchain platform
such as Ethereum. Once deployed, the contract is stored on every node in the network,
making it immutable and secure.
•Smart contracts are triggered by events, like receiving payment or meeting a deadline. Once
triggered, the contract automatically checks if the predefined conditions in the code are met.
•If the conditions are satisfied, the smart contract automatically executes the agreed-upon
action. This could be transferring funds, unlocking a service, or transferring ownership of an
asset.
•Once deployed, a smart contract cannot be changed or altered. This feature ensures that the
terms and conditions remain transparent and permanent, preventing any future tampering or
disputes.
•Since smart contracts are executed on decentralized networks, they don’t rely on any central
authority. This reduces the risk of corruption or manipulation and ensures transparency.
Blockchain and Smart Contracts
•Platforms like Ethereum, EOS, Cardano, and Tezos support smart contracts. Each
platform offers different features in terms of scalability, security, and language
support for developing smart contracts.
•Blockchain provides a decentralized and immutable platform for the execution of
smart contracts. This ensures that once the contract is deployed, it is tamper-proof
and transparent for all participants.
•When a smart contract is executed, a transaction is created and recorded on the
blockchain, making it public and traceable. These transactions help build trust and
transparency.
•The decentralized nature of blockchain makes smart contracts highly secure. Once
deployed, the contract’s code is stored across multiple nodes in the network,
making it resistant to hacking or tampering.
•On platforms like Ethereum, executing a smart contract requires users to pay “gas”
fees. These fees compensate miners for the computational resources required to
execute and validate the contract.
Advantages of Smart Contracts
• Once deployed, smart contracts automatically perform actions based on predefined conditions.
For example, in a loan contract, payments can be made automatically when the due date arrives,
without needing human intervention.
• By eliminating the need for intermediaries, smart contracts drastically reduce transaction costs.
Lawyers, brokers, and notaries are no longer required to verify or enforce contract terms.
• Traditional contract execution can be slow due to paperwork, intermediaries, and manual
processes. Smart contracts execute instantly when conditions are met, ensuring faster
transactions.
• Blockchain’s cryptographic features ensure that once a contract is written and deployed, it’s
highly secure. The contract’s code is tamper-proof, reducing the risk of fraud or hacking.
• Smart contracts do not require trust between parties because the code automatically ensures that
both sides fulfill their obligations. This eliminates the risk of dishonesty or breach of contract.
Use Case 1 - Financial Services
•Smart contracts in finance enable automatic payments for loans, insurance claims, or
dividends. For example, in insurance, once a claim is verified, the contract automatically
triggers payment to the beneficiary without human oversight.
•In peer-to-peer lending, smart contracts help automate loan issuance, repayment
schedules, and interest calculation. The contract enforces the loan terms and triggers
repayments on the due date.
•In decentralized exchanges (DEXs), smart contracts handle trades between users without
intermediaries. They ensure that trades are completed automatically when conditions are
met.
•In the financial markets, derivatives contracts based on assets like stocks or commodities
can be automated through smart contracts. These contracts can trigger settlements
automatically once the conditions are fulfilled.
•Smart contracts can streamline the clearing and settlement process in securities markets.
By automating these processes, they reduce the time and cost associated with manual
settlement.
Use Case 2 - Supply Chain Management
•Smart contracts provide complete transparency in supply chains. Every transaction
is recorded on the blockchain, allowing all parties to track goods in real time and
verify the authenticity of products.
•In supply chains, smart contracts can automate key processes like shipment tracking
and payment transfers. Once a shipment reaches a certain location, the contract can
automatically trigger payment to the supplier.
•With IoT sensors integrated into supply chains, smart contracts can automatically
update the status of goods in transit, providing real-time tracking information to all
stakeholders.
•Smart contracts can help verify the authenticity of goods by recording every step of
the product's journey. This is particularly useful in industries like pharmaceuticals,
where counterfeit products are a major issue.
•By using predefined conditions, smart contracts can resolve disputes automatically
by ensuring both parties fulfill their obligations. This reduces the need for expensive
legal proceedings.
Use Case 3 - Real Estate Transactions
•Smart contracts in real estate can eliminate the need for physical documents, digitizing
the entire process. Contracts are signed and stored on the blockchain, simplifying the
process and reducing errors.
•Smart contracts can act as an escrow service in real estate transactions. The contract
holds the buyer's funds until the conditions of the sale (e.g., property inspection) are met.
•Once the buyer’s funds are confirmed, smart contracts automatically transfer ownership
of the property to the buyer, updating the property title on the blockchain.
•Smart contracts can automate title registration, ensuring that the ownership records are
updated in real-time on the blockchain. This reduces the risk of fraud and ensures
transparency.
•Traditional real estate transactions can be slow due to paperwork and third-party
involvement. Smart contracts speed up the entire process, reducing the time to close a
deal and ensuring that all terms are met.
Use Case 4 - Voting Systems
•Smart contracts in voting systems ensure that votes are securely recorded on a blockchain,
preventing any manipulation or fraud. Blockchain's immutability ensures that once a vote is
cast, it cannot be altered.
•The transparency of the blockchain allows voters and observers to verify the integrity of
the voting process in real-time.
•While the blockchain records the vote, it can be done in a way that ensures voter privacy.
Cryptographic methods like zero-knowledge proofs can be used to keep votes confidential.
•Once voting concludes, smart contracts can automatically tally the results, eliminating the
need for manual counting and reducing the risk of errors.
•Traditional voting systems require intermediaries such as election officials. Smart contracts
automate the entire process, ensuring that votes are counted accurately without human
intervention.
Use Case 5 - Intellectual Property and Copyrights
•Smart contracts can automate the payment of royalties to creators based on predefined terms.
For instance, music streaming platforms can automatically pay artists based on the number of
streams their songs receive.
•Smart contracts can verify ownership of intellectual property by recording the original
creation and subsequent transfers of rights on the blockchain.
•Licensing agreements for digital content can be automated through smart contracts. When a
user wants to use copyrighted material, the contract automatically triggers the licensing fee
payment.
•In cases of copyright infringement, smart contracts can automatically resolve disputes by
checking the terms in the contract and ensuring compliance from all parties.
•Creators can use smart contracts to store irrefutable proof of ownership on the blockchain,
ensuring that their intellectual property rights are clearly recorded and protected.
Use Case 6 - Healthcare and Medical Data
Management
•Smart contracts can automate the process of managing patient data securely and with full
consent. Doctors, patients, and healthcare providers can access patient records on a
blockchain where only authorized parties can make updates.
•Patient consent for sharing data with third-party services, such as research institutes or
insurance companies, can be automated using smart contracts. Consent is recorded on the
blockchain and cannot be changed without approval.
•Smart contracts can help streamline insurance claim processing. Once a claim is submitted,
the contract checks if all necessary medical records are provided, verifies the claim's
eligibility, and automatically triggers payment to the beneficiary.
•In clinical trials, smart contracts can help manage patient enrollment, track progress, and
automatically release payments when milestones are achieved. It ensures that participants
meet the trial's conditions and reduces administrative overhead.
•By automating medical data management and processes like billing, smart contracts reduce
administrative costs, minimize human error, and improve the overall efficiency of
healthcare operations.
Legal and Regulatory Considerations
•The legality of smart contracts varies depending on jurisdiction. While some countries
have embraced blockchain technology, others may have specific legal requirements that
smart contracts must adhere to for enforceability.
•Many jurisdictions recognize smart contracts as legally binding as long as they fulfill the
basic requirements of traditional contracts, such as mutual consent, lawful purpose, and
clear terms.
•Governments are actively exploring frameworks for regulating smart contracts. Some
regions are creating digital contract laws to provide clarity on enforceability and dispute
resolution.
•Jurisdictions like the EU and the United States have started considering the implications of
using smart contracts in various industries. Legal experts must ensure that smart contracts
comply with existing laws regarding privacy, security, and data protection.
Smart Contracts in Decentralized Finance (DeFi)
•Decentralized Finance (DeFi) platforms rely heavily on smart contracts to automate financial
transactions like lending, borrowing, and staking without intermediaries. Users can participate in
financial activities directly from their wallets.
•In lending protocols, smart contracts enable borrowers to take out loans against collateral. Once
conditions are met (such as paying back the loan), the contract automatically returns the collateral to
the borrower.
•Automated market makers (AMMs) are another major use case for smart contracts. These platforms
allow users to trade cryptocurrencies in a decentralized manner, with liquidity pools controlled by
smart contracts rather than centralized exchanges.
•Staking and yield farming in DeFi platforms involve locking up cryptocurrencies in smart contracts
to earn rewards.
•DeFi applications built on smart contracts can automate trading strategies.
Smart Contracts in NFTs (Non-Fungible Tokens)
•Non-Fungible Tokens (NFTs) are digital assets representing ownership or proof of
authenticity of unique items. Smart contracts are used to automate the creation, transfer,
and sale of NFTs on blockchain platforms like Ethereum.
•When a user purchases an NFT, a smart contract automatically transfers ownership of
the token from the seller to the buyer and records this transaction on the blockchain.
•Smart contracts can include royalty clauses for NFT creators. Whenever an NFT is
resold, the contract ensures that a percentage of the sale price goes to the original
creator, making it a valuable tool for artists.
•Smart contracts also enable the creation of NFT marketplaces, where buyers and sellers
can interact without relying on central authorities. These contracts ensure the seamless
and secure transfer of assets.
•Additionally, smart contracts are used to verify the authenticity of NFTs. The metadata
of the token, including its provenance and ownership history, is stored on the blockchain
and accessible to all parties involved.
Security Concerns in Smart Contracts
•While blockchain’s decentralized nature provides enhanced security, smart contracts are
not immune to vulnerabilities. Bugs in the contract code or overlooked edge cases can
lead to severe issues, such as financial losses.
•One of the most well-known vulnerabilities is reentrancy attacks, where a smart
contract’s state is manipulated during the execution of a function, often leading to
unintended behavior and losses.
•Another risk is the possibility of logic errors in the contract’s code. If the conditions or
actions aren’t properly specified, the contract may not behave as expected, leading to
disputes or financial harm.
•Additionally, smart contracts rely on oracles to fetch real-world data. If an oracle is
compromised or provides false data, the smart contract may execute incorrect actions,
resulting in financial losses.
•Smart contract developers must rigorously test and audit the code to identify and mitigate
potential vulnerabilities. Best practices include using formal verification methods, third-
party audits, and adopting the latest security patches.
Challenges in Smart Contract Adoption
•The immutability of smart contracts means that once deployed, they cannot be altered.
While this ensures security and reliability, it also means that any bugs or issues in the
contract’s code cannot be easily fixed.
•The complexity of smart contract programming languages, like Solidity, can be a barrier to
adoption. Developers need specialized knowledge to write secure, efficient, and functional
smart contracts.
•Interoperability between different blockchain platforms is a significant challenge. Smart
contracts deployed on one blockchain, like Ethereum, may not be directly compatible with
contracts on other chains, limiting cross-chain functionality.
•Legal and regulatory uncertainty can hinder the adoption of smart contracts in some
industries. Without clear regulations, businesses are hesitant to fully embrace smart
contracts, fearing potential legal risks or disputes.
•Scalability issues in blockchain platforms can affect the performance of smart contracts. As
the number of users grows, blockchain networks can become congested, leading to higher
transaction fees and slower execution times for smart contracts.
Smart Contract Platforms: Ethereum and Beyond
•Ethereum was the first blockchain to implement smart contracts with the Ethereum Virtual Machine
(EVM), allowing developers to write decentralized applications (dApps). Ethereum’s widespread
adoption has made it the most popular platform for smart contracts.
•Other blockchain platforms, such as EOS, Tezos, and Cardano, also support smart contracts and
offer advantages in terms of scalability, transaction speed, and lower fees. These platforms aim to
address some of Ethereum’s limitations.
•Cardano, for example, uses a unique proof-of-stake consensus mechanism and a formal verification
process for smart contracts, which aims to enhance security and reduce the likelihood of
vulnerabilities.
•Solana is another emerging platform that supports smart contracts, offering high-speed transaction
processing and low fees, making it an attractive option for decentralized finance (DeFi) and gaming
applications.
•Each blockchain platform offers different features and trade-offs, and developers choose the best
platform depending on their specific use case, whether it’s for decentralized finance, supply chain
management, or NFTs.
Future of Smart Contracts
•The future of smart contracts will likely see increased adoption across various industries. As
blockchain technology matures, more businesses and governments are expected to implement
smart contracts for automation and efficiency.
•Improvements in scalability and transaction speeds, such as those being developed by Ethereum
2.0 and other platforms, will make smart contracts more viable for large-scale enterprise use.
•With the rise of decentralized autonomous organizations (DAOs), smart contracts will play an
even bigger role in governance, enabling transparent decision-making processes without the need
for central authority.
•Integration with AI and machine learning can enhance smart contracts by allowing them to make
more complex decisions based on real-world data and predict future events based on historical
trends.
•The legal and regulatory landscape around smart contracts will evolve, with clearer frameworks
emerging for their use, making them more acceptable and enforceable in various jurisdictions.
Conclusion and Key Takeaways
•Smart contracts have the potential to revolutionize a wide range of industries by automating
processes, reducing costs, and increasing transparency.
•They enable decentralized applications (dApps) and provide the foundation for innovations such as
decentralized finance (DeFi), NFTs, and decentralized autonomous organizations (DAOs).
•Despite their benefits, smart contracts still face challenges, including security vulnerabilities, legal
uncertainties, and scalability issues that need to be addressed for widespread adoption.
•As blockchain platforms evolve and improve, the potential for smart contracts to become a
mainstream solution for automating business and legal processes increases.
•Understanding the benefits and limitations of smart contracts is crucial for businesses, developers,
and regulators to make informed decisions about their adoption and integration.
Discussion Questions
•How do smart contracts compare to traditional legal contracts in terms of trust,
flexibility, and enforcement?
•Which industries are most likely to be transformed by smart contracts, and what
specific problems could they solve in those sectors?
•What impact could widespread adoption of smart contracts have on professionals
like lawyers, bankers, and brokers, will their roles evolve or become obsolete?
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• Lecture 10 : Developing Smart Contracts in

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