Smart Contracts Explained: A Comprehensive Guide

In 2023, the global smart contracts market exceeded $1750 million. According to Zion Market Research, this figure will increase by about 24% annually. By 2030, it will reach $9850 million. The number of organizations and private entrepreneurs for whom smart contracts have become commonplace has also grown.

What are smart contracts? What are the benefits of smart contracts in blockchain? How do smart contracts work? Where are smart contracts most in demand? These are the most popular questions about smart contracts we hear from our potential clients. Moreover, many firms and developers are forced into a complex environment when it comes to developing smart contracts. 

Thus, this blog post will provide an in-depth analysis of their importance as well as how they function and how they are created. We have developed dozens of smart contracts for Web3 projects like Nimbus and CryptoSerpent. This guide is intended to equip you with sufficient knowledge on using smart contracts effectively.

What Is a Smart Contract?

A smart contract is a transactional protocol or program that automatically controls and executes the contract terms it prescribes.

The concept of smart contracts was proposed in 1994 by American cryptographer Nick Szabo. It was finished only in 2008, with the advent of blockchain technology and Bitcoin cryptocurrency.

Blockchain allowed for the storage of information about each data chain, which in turn was stored with each network participant. This empowered smart contracts by making them as informative and secure as possible.

However, Bitcoin creator Satoshi Nakamoto, concerned about security, restricted how they could be programmed. Smart contracts were not implemented in Bitcoin software. Nevertheless, the first blockchain paved the way for the implementation of smart contracts.

A new stage in the development of smart contracts technology began in 2013 when Vitalik Buterin created the Ethereum blockchain. It is a universal decentralized blockchain that allows data storage and processing systems to be programmed. Nevertheless, smart contracts exist on multiple blockchains beyond Ethereum:

• Solana. Here, smart contracts are referred to as “programs.” These are written in the Rust, C, or C++ programming languages.
• BNB Chain. BNB Chain is EVM-compatible. Developers can easily port their Ethereum-based smart contracts to BNB Chain with minimal modifications, which has led to its wide adoption for various projects.
• Polkadot. This blockchain uses a framework called Substrate, which allows developers to create custom blockchains and smart contracts. Smart contracts can be written in languages like Rust or Ink!.
• Cardano. It utilizes a unique smart contract language called Plutus, which is based on Haskell. Cardano emphasizes formal verification to ensure the correctness of smart contracts.
• Avalanche. It is another EVM-compatible blockchain that supports Solidity smart contracts, similar to Ethereum and BNB Chain.
• Tezos. Smart contracts on Tezos are written in Michelson or Ligo, and the blockchain is known for its on-chain governance and formal verification features.

Today, Ethereum leads in smart contracts, most written in the Solidity programming language.

How Do Smart Contracts Work?

A smart contract involves performing specific actions while complying with the terms of a contract drawn up in the blockchain. The contract is entered into by users (addresses), which can include both individuals and organizations.

A smart contract includes the contract itself and two public keys. The contract’s creator provides the first of these keys. The second is the contract itself—a unique digital identifier.

The terms of a smart contract are spelled out using the formula: “if… then”. For example, if party A transfers money, then party B transfers the rights to the apartment. Essentially, it is not a contract in the legal sense but a piece of code.

When crypto smart contracts are executed, a blockchain transaction occurs. A smart contract is activated through a personal account or another smart contract.

Types of Smart Contracts

With the development of technology, different smart contracts types have emerged. They are divided according to the following criteria:

• Decentralized and centralized according to the execution environment
• Confidential, partially confidential, and open smart contracts according to the degree of anonymity
• Automated and manual according to the mechanism of execution or initiation (whether the user must confirm the transaction manually at each stage of execution of the contract terms)

Depending on the goals and nuances of the project, the developers endow a smart contract with any of the above characteristics. Different smart contracts use cases describe different types of smart contracts.

Advantages of smart contracts

Smart contracts in crypto are popular for several reasons:

Automation

All the terms of the deal and sanctions for its violation are prescribed in advance. The parties only need to activate the contract to start the fulfillment process. Crypto smart contracts are based on algorithms, so it minimizes the risk of human error. This automation increases the number of uses for smart contracts.

Transparency

Smart contract data is stored in a decentralized digital registry. Therefore, the contracting parties track the execution stages in real-time and ensure everything is going according to plan. 

Reduced costs

The conclusion of a smart contract does not require a face-to-face meeting between the parties or their proxies, nor does it require the mediation of a lawyer, a notary who will have to be paid, or government services that collect fees. You don’t have to go to court or hire a lawyer if its terms are violated. This fact also increases the number of uses for smart contracts.

Security

Information from the blockchain cannot be edited or deleted. This protects the smart contract from manipulation and interference by fraudsters. All transaction information is encrypted using cryptographic methods. This allows anonymity to be maintained by the parties entering the smart contract.

Speed

If you do not enter into a smart contract, the agreement will necessarily require a personal meeting of the parties, mediation of third parties, and the completion of documents. This takes a lot of time and delays a transaction that could have gone much faster.

Challenges of Smart Contracts

Along with advantages, there are some smart contract issues.

Code vulnerability

A smart contract must be closely tied to real-world events with the help of special programs—“oracles”. If information about these events is unreliable, serious program code errors lead to major financial losses when the transaction is completed. 

For example, in Q3 2023, hackers stole $93.27 million by taking advantage of bugs in crypto smart contracts. Smart contracts must be necessarily audited to make sure they are working correctly. To prevent possible threats, you can contact our Dexola team. We write excellent code that gets top marks from auditors like Hachen and Certik.

Lack of legal basis

Legislation in many countries has not yet defined the legal status and regulation of smart contracts. However, this will change over time. For example, the Governor and Senate of Arizona passed a bill that recognized smart contracts as binding legal agreements. 

At Dexola, we consult with experienced Web3 lawyers like Icon.Partners to make sure that our smart contracts meet global standards in the legal field.

Difficulty in making changes

There are no mechanisms in the blockchain to edit the information contained therein. This becomes important when an error is detected in the program code or when a smart contract is updated due to changed terms. This fact stops the number of smart contracts use cases from snowballing.

5 Best Practices for Smart Contracts Development

Smart contracts are among the most popular targets for hackers. Poly Network was hacked for $611 million, Yearn Finance was hacked for $11.6 million, Hundred Finance was hacked for $7.4 million, and there are dozens of other smart contract hacking examples. 

Here are 5 best practices on how to develop smart contracts from our Dexola team:

1. Write modular code. Break down the smart contract into smaller, manageable modules. Modular code is easier to test and maintain. It also improves readability and helps isolate issues if something goes wrong.
2. Follow coding standards. Adhere to industry coding standards and conventions. A consistent coding style improves readability and reduces the likelihood of errors. Utilize established libraries and frameworks that are well-tested and documented.
3. Document everything. Thorough documentation is crucial in developing smart contracts. Clearly comment on your code and explain the purpose and functionality of each part. Good documentation aids in future maintenance and helps other developers understand your work.
4. Optimize gas usage. Smart contracts consume gas, which is transaction fees. Write efficient code to minimize gas usage. Avoid complex calculations or operations within the contract that increase costs. If all the smart contract developers paid attention to gas optimization, we could have many more uses for smart contracts.
5. Handle exceptions gracefully. Design your contract to handle errors and exceptions effectively. Use require statements to enforce conditions and revert transactions when conditions are not met. This prevents the contract from executing invalid operations.

Dune says over 1 billion smart contracts are deployed across all available chains. If you need advice, our Dexola team can consult you on smart contracts development.

5 Key Use Cases of Smart Contracts

Smart contracts support the work of the decentralized finance sector. According to DeFiLlama, the volume of blocked assets exceeds $100 billion as of 25 July 2024. Smart contracts support the work of DAOs, GameFi projects, metaverses, and more.

Despite the technology’s relative newness, smart contracts use cases are snowballing. Finance, logistics, insurance, real estate, and others are interested in smart contracts.

Finance

Crypto smart contracts allow automatic transfers and payments without the mediation of a bank, save on commissions, and also use blockchain instead of a ledger. As a result, a customer can find out when and how a payment was made. This increases the level of trust between him and the organization. 

Numerous banks worldwide are developing Central Bank Digital Currency (CBDC). Smart contracts are needed for their operations. AllianceBlock is building a protocol to bridge decentralized finance (DeFi) and traditional financial services (TradFi).

Taxes

Two functions of smart contracts are important here — automating payments and recording all information in the blockchain. The first prevents forgetting to make a payment, which prevents accidental crime and protects against fines. The second provides access to information about taxes paid. Transparent tax records prevent possible fraud.

Real estate

Smart contracts help conduct all transactions related to purchase and sale, including registration and titling. The client receives the necessary document by transferring money, either personally or through a mortgage company. Banks also use smart contracts to manage financing, and rental companies create digital leases. 

One of the earliest uses of smart contracts in real estate was the sale of a $60k apartment in Ukraine in 2017. Another example is a four-bedroom house in Florida that was sold through a smart contract.

Insurance

A smart contract maximizes the speed of processing claims. When an insured event occurs (property theft, natural disaster, car accident, etc.), the contract automatically requests information about the details (such as the extent of damage). This information is recorded in the blockchain and relied upon to determine the specific amount of compensation. 

French insurance company AXA developed Fizzy, an app using Ethereum to handle flight-delay insurance. Fizzy used smart contracts to manage and distribute payouts. Fizzy speeded up the compensation process by automating payouts based on predefined conditions, removing the need for claims. This approach reduced conflicts between the insurer and clients.

Logistics

This is probably one of the brightest smart contracts use cases. In logistics, they help organize business processes:

• Conduct auctions among suppliers of goods and services
• Organize electronic document flow
• Control information exchange with the objects of the Internet of Things
• Carry out settlements between the customer and the transportation performer
• Automate information exchange and movement of stocks in supply chains, etc.

Everledger is a platform that uses smart contracts to record the accurate origin of various products for transparency and authenticity. Another example is Datahash, Australia’s first full-service agricultural supply chain platform, which is working to thwart the $3 billion-a-year market in fraudulent wine.

What to Consider if You Launch Smart Contract Development

For the last 5 years, our Dexola team has mastered smart contract development processes. Here is what we recommend you to consider before smart contracts development:

1. Security concerns. Be aware of pitfalls like reentrancy attacks and integer overflows. The infamous DAO hack is a lesson in why security is paramount. Never skip professional code audits. Our Dexola team specializes in this. We recommend using tools like MythX and Slither for static analysis. Run extensive unit and integration tests before deployment.
2. Legal and regulatory compliance. Smart contracts can have legal implications. Stay updated on regulations in your region to avoid legal troubles. We also recommend engaging with legal experts specializing in blockchain to draft compliant and enforceable smart contracts.
3. Cost and resources. Allocate funds for development, audits, and deployment. Remember, gas fees on Ethereum can spike, affecting your costs. Ensure you have a robust plan for human and technical resources throughout the project lifecycle.
4. Interoperability. Plan for how your smart contract will interact with other blockchains. Solutions like Polkadot’s parachains facilitate this. You also should integrate with reliable oracles like Chainlink to fetch real-world data. This is crucial for contracts that rely on external inputs.
5. Future-proofing. Design with future growth in mind. Layer 2 solutions like Polygon help manage scalability issues. Use proxy patterns to facilitate upgrades. If all developers paid attention to future-proofing, we could have many more uses for smart contracts.

At Dexola, we partner with famous smart contract auditors like Hacken and CertiK. You can rely on our expertise and entrust your smart contracts to our team.

Top 5 Smart Contract Tools

Today, you can find dozens of tools for blockchain smart contracts development. There are tools developed both by the crypto community and serious organizations. Our Dexola developers highlight the following top smart contract tools in 2024:

• Hardhat. It is a convenient environment for writing smart contracts with built-in functionality for complete development process. Many projects use this environment. Libraries you will need to write tests / interact with smart contracts are Mocha / Chai / Ethers.
• Foundry. It is a relatively new development environment, actively recruiting a developer base. Auditors of smart contracts often use it. Key advantages include writing tests in Solidity and built-in fuzzing plugin.
• Truffle. It’s a cool product that sets the bar for many others. You also need to be well-versed with Drizzle and Ganache. Technologies you will deal with include Javascript, Web3.js, smart contract update plugin from OpenZeppelin, and Etherscan plugin.
• Brownie. Largely “inspired” by the Truffle project, Brownie is essentially a Python analog, but with some differences. Because it’s written in Python, many of the problems associated with working with JavaScript are removed by themselves, and you end up with a surprisingly simple framework for running and deploying smart contracts.
• SBT. SBT interacts with smart contracts almost entirely from the command line or using Scala. It facilitates the development of high-performance Scala libraries and applications that interact with Ethereum smart contracts.

This is just a small part of the top smart contract tools, but the most essential. By the way, we have dealt with most of these top smart contract tools when working on the Liquid Access project.

Dexola experience in smart contract development

We at Dexola are a leading blockchain solutions provider at the forefront of the smart contract revolution. Our reputation as a top-tier smart contract developer is built on several key strengths:

• Expert team. The Dexola team boasts highly skilled blockchain developers and smart contract experts. Our deep understanding of blockchain technology and experience in various industries enables us to create tailored solutions that meet specific business needs.
• Proven track record. Dexola has a history of successful projects, each demonstrating its ability to deliver robust and secure smart contracts
• Innovation and adaptability. Dexola is at the forefront of blockchain innovation. We continuously update our knowledge and adapt to the latest technological advancements, ensuring their solutions are always state-of-the-art.

Anmol Network case study proves all that. Within a month, we developed smart contracts on the Ethereum network, backend, frontend, and performed full product testing. We delivered a unique EIP721 project token, a custom image generator called Anmol Moulds, full frontend development, and integrated Web3 into the existing project.

Conclusion

The number of smart contract users will only grow yearly and smart contracts use cases prove that. Smart contracts automate routine activities that previously had to be done manually, eliminate intermediaries, and simplify business processes. The problems associated with the smart contract protocol will sooner or later be solved, and as opportunities grow, trust in them will also increase.

We at Dexola work with a huge technology stack and most top smart contract tools, staying abreast of Web3 development advancements. Our team is ready to innovate and collaborate, ensuring that your smart contracts maintain robust security. Feel free to contact us, and we will be happy to discuss how we can help you develop your smart contracts.