Blockchain-based smart contracts are getting more than their fair share of attention in the media these days. There’s no shortage of ‘influencers’ in the blockchain community leaping to the technology’s praise. Smart contracts, they say, make business deals more efficient and cut out the need for the middleman.
But what exactly is a smart contract and are they all that smart?
The concept of smart contracts was first conceived by Nick Szabo, a legal scholar and cryptographer known for laying the groundwork for digital currency. Back in 1994, he had the idea that decentralised ledgers could be used as self-executable contracts.
Essentially, smart contracts are software codes that contain a set of rules which executes automatically, without a third party, if the rules of the contract are met.
Advocates of smart contracts say they enable transactions and agreements to be carried out without intermediaries such as banks and lawyers. They also make transactions traceable, transparent, and irreversible, thus reducing conflicts and increasing oversight. Furthermore, they offer the opportunity to automate transactions.
But despite all the excitement, the commercial use of blockchain-based smart contracts remains nascent with many initiatives stuck in a sort of proof-of-concept limbo.
Are smart contracts stupid?
Perhaps this is because smart contracts aren’t smart enough yet. There’s a huge amount of nuanced legal and practical expertise that goes into drafting contracts in the real world that you’re never going to get from smart contracts in their current iterations. Contracts are subject to interpretation, and a computer algorithm doesn’t have the autonomy or ability to make the necessary judgements.
According to Ollie O’Donoghue, research VP at HFS Research, smart contracts are also proving difficult for enterprises to build.
He said: “You need people that understand data because smart contracts need data flows, you need developers that understand blockchain, and you need developers that understand the specific business use-case; then you need lawyers because contracts require and understanding of local legislation and regulation.
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“It’s almost like a mythical unicorn team that you need to be able to build these smart contracts. I’m not saying it’s impossible, but organisations are not doing it and why should they?”
Perhaps smart contracts have a place in more simplistic use cases. For example, smart contracts could ensure that more simple, straightforward transactions are made if certain conditions are fulfilled.
But is this anything new? Isn’t a vending machine technically doing the same thing that a smart contract promises to do? Once a vending machine confirms that you have inserted the right amount of money, it is pre-programmed to dispense your order without the need for anyone to operate it.
The immutability problem
One of the common allures of smart contracts today hinges on their deployment in a decentralised blockchain. Why? Immutability. Once a smart contract is deployed, it cannot be altered by a party unilaterally.
However, while many say this is a good thing because it means the actions specified in the contract are guaranteed to take place in the precise manner it was first coded, it causes a lot of practical problems; parties are unable to make amendments to smart contracts. If there are errors in the initial code, immutability also means smart contracts cannot be rectified.
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According to Cornell University Professor Ari Juels, technical mechanisms in smart contracts can overcome these hurdles.
Speaking with Capgemini, he said: “One possible approach is what we often refer to as an ‘escape hatch,’ a preprogrammed way of changing the terms of a smart contract. Ensuring that the right permissions are incorporated into the escape hatch itself is tricky, though, as is ensuring its correct implementation.”
Can they be trusted?
When smart contracts first came into prominence, one of the most talked-about benefits was around the trust they would bring to transactions. But according to O’Donoghue, smart contracts are only a good as the quality of the data they receive; the well-known garbage in, garbage out conundrum.
He explained: “Traditionally, when you bought eggs in a shop and the package said free-range, you just had to trust it was true because there was no other information available. As we know, with news like the horse meat scandal, supply chains are pretty murky, and suppliers lie. Smart contracts were going to be the solution according to blockchain evangelists because you could lock all the information down in the code. Consumers would be able to scan an egg packet with their mobile and confirm it comes from a free-range farm and see the chickens having a wonderful time.
“The problem is that you can defraud that really quickly because it relies on the data being put in to be true. All a supplier has to do is just say they’re a free-range farm; all they’re doing is building a network of trust with rubbish information.”
Security issues
To top things off blockchain-based smart contracts posses inherent risks, such as vulnerabilities in the code which can be exploited by malicious hackers. In 2017, Parity’s smart contract for multi-signature wallets was breached by a hacker which resulted in the loss of 513,774.16 ethers from 587 wallets, as well as additional tokens (back then that was about $152 million). Just a few months earlier, a bug in an earlier version of the same wallet allowed hackers to snatch roughly 150,000 ethers. Shortly before that, a Canadian exchange accidentally trapped $13 million in its own broken smart contract.
Perhaps one day smart contracts will reach a point where they can truly upend the status quo. CTOs looking to utilise blockchain-based smart contracts right now should be very careful in adoption. Assessing technical maturity is a vital component of a successful deployment of any shiny new piece of tech.
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