In a smart contract, technology — notably blockchain —takes the place of a human intermediary. The terms and conditions are written as lines of code distributed over the network, taking effect once the involved parties have met the predetermined requirements noted in the contract. Because of this, smart contracts record all that the parties do better than human overseers, and any transactions made are irreversible.
Creating a smart contract isn’t a lot different from drafting one on paper. However, sophisticated technology plays a more significant role in its creation, so it may involve a few additional steps and expertise other than contract law.
Anyone involved in tech-heavy industries, such as insurance, healthcare, logistics, and the like, may want to keep the following tips in mind when making one:
1. You Can’t Go Wrong With Ethereum
Computer scientist Nick Szabo first conceived the notion of a self-administering contract as early as the mid-1990s. In their scholarly paper, they used vending machines as an analogy to explain how it works: insert the correct amount of money, choose an item, and receive the dispensed product. Once that item falls into the pickup box, the transaction is finalized—there’s no getting the money back.
Smart contracts are like vending machines but linked to a shared network. Nonetheless, it wasn’t until the advent of blockchain technology’s launch a few years back that it became a reality. Today, smart contracts benefit from the myriad of blockchain platforms available.
That said, when looking for a suitable hosting platform, experts believe Ethereum is undoubtedly a safe choice. As the first platform designed for creating and hosting smart contracts, Ethereum has a proven track record of ease of use and reliability. Experts also say it’s worth sticking to this platform for a while, as its successor Ethereum 2.0 (also known as Serenity) is coming soon.
The platform does have some drawbacks, such as poor scalability and high energy consumption. If such issues make Ethereum unappealing, Ethereum-based platforms are the next best options. You can check out the post right here for more details on them. Some of these are even designed for specific industries.
2. Never Pinch Pennies On Cybersecurity
Smart contracts enjoy a high level of security because of how blockchain works. If you need a refresher, below are three features that contribute to its security:
- Every block has its unique key that’s only verifiable with a public key. Any change to the block data invalidates the key and discards it from the network.
- Blockchain is distributed over multiple computers, so attacking one node doesn’t bring down the entire system. Private crypto networks do lose some of this advantage, though.
- The consensus mechanism that blockchain operates on ensures that the multiple nodes can verify any transaction made in the network, reducing the risk of fraud.
Of course, no technology is invulnerable to cyberattacks, and blockchain is no exception. A 2020 report logged 122 hacking incidents that year, stealing close to USD$3.8 billion worth of tokens, projects, and other data. While a slight drop from 133 incidents recorded in 2019, the figure stays higher than the total cases between 2012 and 2018.
Smart contracts are as much of a target for hackers as digital currencies, considering that millions worth of capital is riding on them. Businesses and organizations need to spend as much as they can on shoring up their cybersecurity as they make these contracts.
Below are a few tips from experts:
- Avoid having unnecessary functions in the contract, as they might provide hackers with more ways to get into the system.
- Choose the contract’s programming language carefully and follow its best practices. It’s essential to take note that there’s no one-size-fits-all solution here.
- Test the code builds as frequently as possible and even consider employing additional tools. If the budget allows, have a third-party auditing service perform the tests.
3. Make Sure The Data Is Correct
Equally crucial to the choice of the blockchain platform and security practices is the data that’ll go into the smart contract. Many experts have warned that the wrong kind can render the entire agreement useless.
By design, blockchain technology derives data from external sources, like apps and feeds. It doesn’t directly retrieve the data but relies on middleware known as ‘oracles,’ which bridge real-time input and the blockchain itself. How a contract executes its programming depends on what data it gets from these oracles.
In other words, while blockchain can protect existing data from tampering, it can’t fully guarantee its accuracy. The data still needs to come from an outside source, say a data provider, and parties in the contract have to trust it. Conflict of interest comes into play here, and it’s not unusual for any business or organization to make moves to gain the edge.
While it might look bleak, ensuring data integrity isn’t impossible. One of the measures experts often cite is an audit trail, a record that details the procedures in which financial data is derived. The information allows businesses and organizations to trace discrepancies to their exact source and make the necessary fixes.
4. Keep It Simple
There’s still a great deal that people don’t know about the blockchain for it’s still considered by many as a nascent technology. Even the most experienced programmers admit they get parts of their private crypto network’s code wrong. The decentralized nature and lack of standards don’t help either.
Due to blockchain’s complexity, creating a smart contract is by no means cheap. The price tag depends on four factors: bytecode size, a 32,000-gas flat fee, transaction (TX) data size, and constructor analysis. The math behind this is as complicated as blockchain itself, but a medium-scale contract can run upwards of USD$5,000.
Smart contracts should be kept as simple as possible to keep costs to a minimum. Small players can get away with basic ones for as low as USD$500, while the conservative minimum for the medium and large players is USD$1,600. Keep in mind that the prices stated here depend on the current value of Ethereum in the market.
Even for tech-oriented firms and industries, creating a smart contract is no easy feat. It demands greater attention to detail, as any part of the contract can’t be changed once it goes live. But if done right, this agreement will be an invaluable tool in protecting projects from economic losses.