Ethereum Smart Contracts 101

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One of Ethereum's central features is its smart contract functionality. The concept of smart contracts came about in the '90s, but it saw limited implementation due to technological restrictions. With the development of blockchain technology, Ethereum and other platforms have begun to use smart contracts as a core feature of their projects.

The main advantage of smart contracts is that they can be used to facilitate and enforce contracts. When we think about how normal contracts are completed, they are tremendously inefficient. They rely on teams of lawyers, piles of papers, an effective judiciary and the strong arm of police to punish anyone who fails to meet their obligations. Without all of this, business deals could never get done–how could you trust another party to do what they said they would, without the threat of jail or other punishments to make them honor their word?

The beauty of smart contracts is that they are self-executing and self-enforcing. Once the conditions of the contract are met, Ethereum automatically completes the deal. If a project is raising funds from the community, smart contract functionality can be used to hold the money in escrow until the goal is reached. If it isn't met, or the project is unsuccessful, the money is returned to the contributors automatically. This can save significant amounts of money, by avoiding legal and other bureaucratic costs.

Smart Contracts Are Not Foolproof

Unfortunately for Ethereum, some of its biggest media exposure came about as a result of the DAO hack. The DAO contained about $150 million worth of ether as investment capital. A user exploited a vulnerability which allowed them to move about $50 million worth of ether into a ChildDAO, which only they had control over. Faced with the potential loss of a third of their funding, after a fierce debate that took several weeks, the community decided to hard-fork the chain to reclaim the funds.

This caused extensive drama within the community, because it showed just how vulnerable smart contracts could be. Another problem is that the hard-fork went against the principles of many members of the community. This led to Ethereum essentially splitting in two, the Ethereum which was hard-forked, as well as Ethereum Classic, the original Ethereum.

The point is that smart contracts are far from perfect. A simple bug can lead to the theft of millions and the complete disruption of the community. As Ethereum matures, it is hoped that greater security measures will be integrated. At the moment, there is still potential for the technology to be exploited.

The Future of Smart Contracts

Because Ethereum was only launched in 2014, the technology is still immature. In these early days, there are bound to be teething problems and these can cost significant amounts of money. The Ethereum community and potential investors need to recognize that this is groundbreaking technology. As with any new technology, there is tremendous potential in Ethereum and smart contracts. In saying this, there is also a high possibility for disaster, like we have already seen with the DAO hack.