Introduction to Smart Contracts: Applications and Concepts PDF

Introduction and Applications of Smart Contracts  What is Blockchain? ⦿ Blockchain technology is a software; a protocol for the secure transfer of unique instances of value (e.g. money, property, contracts, and identity credentials) via the internet with...

Introduction and Applications of Smart Contracts  What is Blockchain? ⦿ Blockchain technology is a software; a protocol for the secure transfer of unique instances of value (e.g. money, property, contracts, and identity credentials) via the internet without requiring a third-party intermediary such as a bank or government ⦿ Applicatio Email over IP, VoicePhon over IP, Money over IP n Email Bitcoin e calls Protoc SMTP VoIP Blockchai ol n Infrastructu re Internet Page 7 © Copyright 2017 | All Right Reserved  How does Bitcoin work? Use eWallet app to submit transaction Scan recipient’s $ appears in recipient’s address and submit eWallet transaction Wallet has keys not money Creates PKI Signature address A new PKI hashed signature for each pairs transaction Source: https://www.youtube.com/watch?v=t5JGQXCTe3c Page 8 © Copyright 2017 | All Right Reserved  P2P network confirms & transactions records Transactions submitted to mempool, and miners Transaction computationally assemble new batch (block) of transactions each confirmed Ledger account 10 min balances updated Each block includes a cryptographic hash of the last block, chaining the blocks, hence Peer nodes maintain distributed “Blockchain” ledger Source: https://www.youtube.com/watch?v=t5JGQXCTe3c Page 9 © Copyright 2017 | All Right Reserved  How robust is the Bitcoin p2p network? 11,678 global nodes run full Bitcoind (2/18); 160 gb p2p: peer to peer; Source: https://bitnodes.21.co, https://github.com/bitcoin/bitcoin Page 10 © Copyright 2017 | All Right Reserved  What is Bitcoin mining? Run the software yourself: Mining is the accounting function to record transactions, fee-based ($130,000/block each 10 min) Mining ASICs “discover new blocks” Mining software makes nonce guesses to win the right to record a new block (“discover a block”) At the rate of 2^32 (4 billion) hashes (guesses)/second One machine at random guesses the 32-bit nonce Winning machine confirms and records the transactions, and collects the rewards All nodes confirm the transactions and append the new block to their copy of the distributed ledger “Wasteful” effort deters malicious players Fast because ASICs Page 11 © Copyright 2017 | All Right represent Reserved the  Key Blockchain Concepts ⦿Public-private networks ⦿Trustless vs trusted ⦿Distributed network ⦿Consensus algorithms ⦿Immutability ⦿Blockchain: trustless, distributed (peer- based), consensus-driven, immutable Page 12 © Copyright 2017 | All Right Reserved  What is a Ledger? ⦿A ledger is like a database, a Google or Excel spreadsheet ⦿Add new records by appending rows ⦿Each row contains information ⦿Account balances, who owns certain assets ⦿Memory and execution Page 13 state of a computer © Copyright 2017 | All Right Reserved  Why Distributed? ⦿Distributed network ⦿Many nodes or peers that are connected in a network with no single point of failure or centralized control ⦿Security and resiliency: design the network so that if some peers crash or attack the network maliciously, the network can still operate (Byzantine Fault Page 14 Tolerance) © Copyright 2017 | All Right Reserved  What is Immutable? ⦿Cannot change the data once its committed to the ledger ⦿Data is auditable ⦿Change by issuing offsetting transaction ⦿Smart contract code Page 15 © Copyright 2017 | All Right Reserved  Cryptographic Identity ⦿To use the network, need a Cryptographic Identity ⦿(sort of like an email address) ⦿If want to access your email, you need the password, which functions similarly to a private key and your public key is like your address (more complicated) ⦿Authentication: peers sign transactions with their cryptographic identity, this enables account “ownership” and can Page 16 attribute blame © Copyright 2017 | All Right Reserved  Consensus in Distributed Networks ⦿In order to update the ledger, the network needs to come to consensus using an algorithm ⦿Consensus: what does it mean to come to consensus on a distributed network? ⦿It means that everyone agrees on the current state (e.g. how much money does each account have) and making sure that no one is double- spending money (easy in Bitcoin, more complex in Ethereum, business networks) ⦿How do we come to consensus in this distributed manner? Page 17 © Copyright 2017 | All Right Reserved  Three Primary Consensus Algorithms ⦿POW: Proof of Work (Bitcoin) ⦿Expensive, not ecological, wasteful computation ⦿POS: Proof of Stake (Ethereum) ⦿Next-gen: PBFT: Practical Byzantine Fault Tolerance (DFINITY, Algorand) ⦿ Law of large numbers: diversity of participants ⦿ For each block of transactions, randomly select a small, one-time group of users in a safe and fair way ⦿ To protect from attackers, the identities of these users are hidden until the block is confirmed ⦿ The size of this group remains constant as the network grows Page 18 © Copyright 2017 | All Right Reserved  Key Blockchain Concepts ⦿Public-private networks ⦿Trustless vs trusted ⦿Distributed network ⦿Consensus algorithms ⦿Immutability ⦿Blockchain: trustless, distributed (peer- based), consensus-driven, immutable Page 19 © Copyright 2017 | All Right Reserved Blockchain Context X Code is law What are Smart Contracts Definition: Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They automatically enforce and execute the terms of the contract when predefined conditions are met. Characteristics: - Immutable - Trustless - Automated - Secure What are Smart Contracts 1. **Immutable:** Once deployed on the blockchain, smart contracts cannot be altered or tampered with, providing a high level of security and trust. 2. **Trustless:** Smart contracts operate on a decentralized network, removing the need for trust between parties as the code itself ensures execution without the need for intermediaries. What are Smart Contracts 3. **Automated:** Smart contracts automatically execute actions when specific conditions are met, eliminating the need for manual intervention and reducing the potential for human error. 4. **Secure:** Utilizing cryptographic techniques and operating on a distributed ledger, smart contracts offer enhanced security, making them resistant to fraud and unauthorized alterations. Smart contracts represent a significant innovation in contract execution, offering efficiency, transparency, and security in various applications across industries. Brief History of Smart Contracts - Early Concept: Proposed by computer scientist Nick Szabo in 1994. - Ethereum Introduction: Vitalik Buterin introduced Ethereum in 2013, which popularized the concept of smart contracts by allowing developers to deploy them on its blockchain. - Evolution: Since then, smart contracts have evolved significantly, finding applications across various industries. Applications of Smart Contracts - Financial Services: - Automated Payments - Loan Agreements - Derivatives Trading - Supply Chain Management: - Traceability - Transparency - Automated Compliance Supply chain management (SCM) in the context of smart contracts involves leveraging blockchain technology to improve transparency, traceability, and efficiency in supply chain operations. Smart contracts can automate and streamline various aspects of the supply chain, including procurement, logistics, inventory management, and payment settlements. Applications of Smart Contracts - Real Estate: - Property Transfers - Rental Agreements - Healthcare: - Patient Data Management - Insurance Claims Processing - Drug Traceability Applications of Smart Contracts - Legal Industry: - Automated Contract Execution - Legal Documentation Management - Dispute Resolution - Gaming and Entertainment: - In-game Asset Trading - Ticket Sales - Royalty Distribution Smart Contracts Examples Supply chain Example 1 of Smart Contracts Creating a flowchart for a smart contract related to food delivery involves multiple steps and interactions between various parties. Here's a simplified flowchart outlining the basic logic: Start | Input Order Details (Customer Address, Delivery Address, Items, Payment Details) | Verify Payment | Accept Order | Assign Delivery Person | Pickup Order | Deliver Order to Customer Address | Confirm Delivery | Release Payment to Delivery Person | End Example 1 of Smart Contracts Let's break down the flow: Start: The contract execution begins. Input Order Details: Input data including the customer's address, delivery address, ordered items, and payment details. Verify Payment: Verify that the payment has been made by the customer. Accept Order: If the payment is verified, accept the order. Assign Delivery Person: Assign a delivery person to fulfill the order. Pickup Order: The delivery person picks up the order from the restaurant or designated pickup location. Deliver Order to Customer Address: The delivery person delivers the order to the customer's specified address. Confirm Delivery: The customer confirms the receipt of the order. Release Payment to Delivery Person: If the delivery is  Example 2 of Smart Contracts Creating a flowchart for a smart contract can be a bit abstract since smart contracts are typically written in programming languages such as Solidity for the Ethereum blockchain. However, I can provide you with a simplified flowchart that outlines the logic of a basic smart contract. Let's consider a simple example of a token transfer smart contract. Start | Input Sender Address, Receiver Address, Token Amount | Check if Sender has Sufficient Balance | If Yes, Deduct Token Amount from Sender's Balance | Add Token Amount to Receiver's Balance | Update Sender's and Receiver's Balances on the Blockchain | End  Example of Smart Contracts This flowchart represents a basic smart contract logic for transferring tokens between two parties on a blockchain. Here's a breakdown of the flow: Start: The contract execution begins. Input Sender Address, Receiver Address, Token Amount: Input data including the sender's address, receiver's address, and the amount of tokens to transfer. Check if Sender has Sufficient Balance: Verify if the sender has enough tokens to transfer. Deduct Token Amount from Sender's Balance: If the sender has sufficient balance, deduct the token amount from their balance. Add Token Amount to Receiver's Balance: Add the deducted token amount to the receiver's balance. Update Sender's and Receiver's Balances on the Blockchain: Update the balances of both the sender and receiver on the blockchain. End: Contract execution concludes. Benefits of Smart Contracts - Efficiency: Automation reduces manual intervention and speeds up processes. - Transparency: All transactions are recorded on a distributed ledger, ensuring transparency and auditability. - Security: Cryptography and decentralization enhance security, reducing the risk of fraud or tampering. - Cost Savings: Eliminates the need for intermediaries, reducing overhead costs. - Accessibility: Smart contracts can be accessed and executed from anywhere with an internet connection. Challenges and Considerations - Scalability: Current blockchain technologies face scalability issues, limiting the number of transactions per second. - Security Risks: Smart contracts are susceptible to bugs and vulnerabilities that could lead to financial losses. - Legal Compliance: Ambiguities in legal frameworks regarding smart contracts pose challenges for adoption. - User Experience: The complexity of smart contract development and execution may deter mainstream adoption. Challenges and Considerations Scalability: Current blockchain technologies face scalability issues, limiting the number of transactions per second. Explanation: Current blockchain technologies, including those on which smart contracts are deployed, often face scalability issues. This means that as more transactions occur on the network, the speed and efficiency of processing those transactions can decrease. Example: In a decentralized finance (DeFi) application where smart contracts are used for lending and borrowing, high transaction volumes can lead to network congestion and increased transaction fees. This can deter users and limit the scalability of the application. Challenges and Considerations Security Risks: Explanation: Smart contracts are susceptible to bugs and vulnerabilities in their code, which can lead to unintended consequences or exploitation by malicious actors. Once deployed, smart contracts are immutable, meaning any errors or vulnerabilities cannot be easily rectified. Example: In 2016, the Decentralized Autonomous Organization (DAO) was exploited due to a vulnerability in its smart contract code, resulting in the loss of millions of dollars worth of cryptocurrency. This incident highlighted the importance of thorough auditing and testing of smart contract code to mitigate security risks. Challenges and Considerations Legal Compliance: Explanation: Legal frameworks regarding smart contracts vary across jurisdictions and may not always align with the technology's capabilities. Ambiguities in laws and regulations can pose challenges for the widespread adoption of smart contracts, particularly in areas such as contract enforceability and dispute resolution. Example: In some jurisdictions, traditional contract law may require written agreements signed by all parties, which may conflict with the purely digital nature of smart contracts. Resolving these legal ambiguities is crucial for the broader acceptance and integration of smart contracts into legal frameworks. Challenges and Considerations User Experience: Explanation: The complexity of developing, deploying, and interacting with smart contracts can be a barrier to mainstream adoption. Users may require technical expertise to understand how smart contracts function and how to interact with them effectively. Example: A decentralized application (DApp) built on smart contracts may require users to manage private keys and interact with blockchain wallets, which can be intimidating for those unfamiliar with blockchain technology. Improving the user experience through intuitive interfaces and simplified processes is essential for increasing adoption. Addressing these challenges through technological advancements, regulatory clarity, and improved user interfaces is critical for unlocking the full potential of smart contracts and realizing their benefits across various Smart Contract Lifecycle ABI stands for Application Binary Interface. The ABI defines how functions and data are accessed in a smart contract. It serves as an interface between the compiled smart contract bytecode and the outside world, enabling external applications, such as user interfaces or other smart contracts, to interact with the contract. The ABI specifies the following details: Function Signatures: It includes the names and parameters of the functions defined in the smart contract, along with their input and output data types. Events: It describes the structure of events emitted by the smart contract, including their names and parameters. Data Structures: It outlines the layout of complex data structures used within the smart contract. The ABI is crucial for developers who want to interact with a deployed smart contract programmatically. It allows them to understand how to construct function calls and interpret the responses from the contract. Additionally, ABI is essential for tools and libraries that facilitate smart contract interactions, Interacting with a Smart Contract Smart contract is not self-executable It requires an external call to be executed. Otherwise, it is pending till one calls one of its implemented functions Once it is executed, transactions resulting from the execution are transcribed on the blockchain and eventually smart contract’s meta data are updated Interacting with a Smart Contract Contract address and its ABI are needed in order to communicate with a smart contract Smart contract execution can be launched by human (private key account) or by smart contract (public key account) calls Example of smart contract calls: alarm clock service Alarm Clock Service Smart contracts are not self-executable A transaction is executed as soon as it is added to a block Ethereum contracts that do not implement suicide, and allows to schedule any contract function calls in a specified block Equivalent to decentralized crons Scheduling can be done by contracts or Ethereum account holders Scheduled function calls execution allow to earn ethers Anyone can execute function call since he is operating on Ethereum node We can specify a list of authorized schedulers addresses Alarm clock contract specifies the transaction details: destination address, execution time window, transaction gas cost and the reward to be paid to the account that triggered the transaction