Smart Contract — A Comprehensive Introduction
Tags: Blockchain Technology, Crypto Exchange, Smart Contracts, Cryptocurrency, Consensus

The birth of Bitcoin made the whole world know about what blockchain is. Later many tech enthusiasts started to scrutinize the functionality of blockchain technology. Blockchain is leading to so many innovations and evolutions that are constantly emerging in the world. The arrival of blockchain technology paved the transformation of different sectors to a decentralized network. This advent created the cryptocurrency market to flourish much more.

Many cryptocurrencies and crypto exchanges started to emerge in the crypto market. With the concept of decentralization, the whole transformation powered up to all the tokens and exchanges out there. That made traditional crypto exchanges (i.e) centralized exchanges to decentralized exchanges (DEX). There is a huge craze on decentralized exchange and many investors are building their DEX to make profits out of it.

Centralized vs Decentralized Exchanges

Centralized exchange (a.k.a CEX) is the traditional exchange. There will be a middle-man involved in the transactions done through CEX. For every transaction, the middle-man will charge some amount as a commission or brokerage. Here, the transactions can be either done by fiat-to-crypto or crypto-to-crypto.

The centralized exchange has an escrow system as a security feature. So, any asset can be pegged with the cryptocurrency. The asset will be in the hands of the middle-man until the transaction gets successful.

A decentralized exchange is contrary to a Centralized exchange. DEX cuts off the involvement of the middle-man during the transactions. Naturally, there will be no commission or brokerage charged for every trade and transaction done through the DEX.

Cryptocurrency Exchange

The entire DEX works as the Distributed Ledger Technology (DLT), the details of the transactions are stored on the blocks of the network which is very hard to track the personal information or data. So, this type of exchange is secured during the transactions. The entire transaction process is carried out in a peer-to-peer manner which is one-to-one, therefore the transactions are quite fast and transparent. Transactions are made with the help of a Private key, Public Key, and Smart Contract.

What is a Smart Contract?

A smart contract is a predefined line of code that is embedded in the crypto exchange’s back-end functions. It automatically works when the terms and conditions of the two users are involved in a transaction met. Smart Contracts are stored in the public server so that cannot be modified. The transactions that happen through the smart contract are preceded by blockchain. These lines of code cut downs the middle-man and the charges involved during the transaction.

Smart Contract in Global Sectors

Smart contracts can be brought into the transactions of global sectors like banking, insurance, agriculture, and government. Transparency will be maintained in the transactions done in the industry. Because of the reliability in the transactions, many might come forward to shift to smart contracts.

Smart Contract

Why is Smart Contract the Solution?

Sectors like banking and insurance will have huge transactions happening in a day. There will be millions and billions of transactional details will be shared. As this is the digital era when everything is turning towards advanced technologies, that also fits the hackers’ community too. The hackers are constantly trying to find a loophole to inject a threat or ransomware during the transaction. This will lead to money laundering.

To prevent such abnormal activities from the hackers’ side, smart contracts are introduced to prevent such illegal activities.

How Smart Contracts Acts an Iron Curtain?

The development of smart contracts includes complex programming structures and algorithms to make it unbreakable and insusceptible for cyber or any malicious attacks. When the user does a transaction, every transaction is stored in a form of a block with a hash code in it. When a user is transacting to another user, the sender must have a public key of the beneficiary. The sender can approve the transaction with the help of a private key which acts as a passcode for the account and a digital signature which is used instead of the personal details. After the miner validates the sender’s account details, the transaction is done. This complex back-end process makes the entire transaction to end fruitfully. This will be very hard for hackers to trace or break the iron curtain securities that are enabled in the blockchain technology.

Security

Benefits of Smart Contracts

There are n number of benefits that the entire blockchain ecosystem experience through enabling smart contract.

Security — The transactions done through the smart contract are very secure because there is no involvement of any third-person.

Anonymity — The personal data and transaction information are completely concealed from the view of the other. The information is concealed by the digital signature.

Transparency — The transactions are transparent that is stored in the form of blocks in a distributive ledger. Anyone involved in the transaction can view it later.

Swiftness — The transactions are nimble even in the peak hours of trading. As it is done in a peer-to-peer manner, the time required for a transaction is very little.

Immutable — The entire ecosystem is immutable. The technology is insusceptible to hackers or any other malicious attacks.

Phases of Smart Contracts

There some phases involved during the process of smart contract, they are:

Creation — The contracts are created based on the agreement of both parties. With the acknowledgment of both parties, the line of code is being prepared as a smart contract.

Freezing — When the transaction is processed, it has to approve all the requirements in the smart contract, only then the process will be carried out.

Execution — After meeting the requirement, the validating process is done by the miners. Once the validation is done the transaction is executed and forms a block as a public ledger.

Finalization — The transaction becomes finalized once the asset becomes unfrozen.

So…

Day to day there will be many evolutions in the technology relatively there will be an increase in hackers too. There is a fact that, In the last three years, the money laundering and theft rate is rising.

In the FY-18, Rs 44.25 cr was lost in 927 incidents. Also, in the FY-19, Rs 68.45 cr was lost in 1302 incidents.

Having this fact as proof, banks, insurance, and other industries can think about implementing smart contracts with the help of blockchain will provide safe and secure transactions.