Blockchain technology is a cornerstone of cryptocurrencies. In the future, it may very well become the cornerstone of traditional finance. Extending the native functionality of this technology is crucial. Smart contracts are a great example of how new use cases can be unlocked.
Extending a Blockchain
On the surface, a blockchain is a great ledger to store and record all kinds of information. Particularly those seeking to create an immutable record of information will take an interest in this technology. It is also the core infrastructure of popular cryptocurrencies – such as Bitcoin.
Having an immutable ledger of transactions or other types of data is one thing. Interacting with it can be done, albeit there are some limitations.
By default, a blockchain on its own cannot interact with real-world information not recorded on the chain at a previous time. This would make the technology incompatible for most use cases, but there is a solution.
It is worth noting this solution is not a millennial thing. It was first proposed in the early 1990s, albeit it was deemed impossible to pull off properly at that time. Now that blockchain technology has become widely accessible, the concept has been revisited by numerous projects and startups all over the world.
Smart Contracts Have Potential
One should look at smart contracts as a natural extension of a blockchain. Without a decentralized blockchain, there cannot be smart contracts without intermediaries. The main selling point of a distributed ledger is how it removes the need for third parties altogether. Smart contracts further capitalize on this crucial aspect.
A smart contract can be seen as a computer protocol for the digital age. It allows the performance of a digital contract under very specific conditions. That information is then routed through a blockchain to ensure it cannot be altered at a later date. All transactions – financially or otherwise – passing through a smart contract are irreversible and trackable.
Underneath the code, smart contracts allow developers to interact with real-world events. This can range from a transfer of value to a specific date and time, as well as a plethora of other events. Once the conditions for the contract are met properly, the predetermined outcome will unfold on its own accord.
Technical Know-how Required
This extension of digital ledgers comes with its own rather steep learning curve. To properly use smart contracts in a decentralized environment, any knowledge of Byzantine fault-tolerant algorithms is a bonus.
One may also need to learn a brand new coding language. Not every distributed ledger ecosystem is compatible with the common languages, albeit that situation may improve over time.
Smart contracts also benefit from Turing-completeness. Not all major blockchains provide that aspect, with Bitcoin being a primary example. Ethereum, on the other hand, is as close to Turing-complete as it can be under the current circumstances. Enterprise-grade solutions are also available, albeit their state of Turing-completeness varies greatly.
Security Concerns Remain
When an extension of relatively new technology gains traction, there will be security concerns. In the smart contract industry, that situation is no different. As these protocols and contracts are still written by human coders, the chance of an error or failure are relatively high.
It will take a fair few years until this technology is ready for mainstream use. Over the years, there have been numerous issues affecting smart contracts developed on various cryptocurrency blockchains. As more ecosystems provide this functionality – and attract more coders in the process – further improvements will be made in terms of security and accessibility.