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Lesson 8
5 min

What are smart contracts?

Explore the power and influence of smart contracts, the self-executing digital contract with the potential to transform how parties make agreements between one another using blockchain technology.

Key Points:

  • Smart contracts automate operations based on predefined logic, and operate autonomously on blockchain networks.
  • Within the Ethereum network, smart contracts are written in Solidity and deployed on the Ethereum Virtual Machine (EVM).
  • Oracles, such as Chainlink and Pyth Network, allow smart contracts to interact with real world data, significantly expanding applications and use-cases.
  • Integration with artificial intelligence (AI) presents exciting possibilities, such as optimized automation and decision-making capabilities.
  • Alternative models, such as language-agnostic smart contracts, aim to address smart contract limitations by providing more scalable and secure solutions.

What are smart contracts?

Smart contracts, first proposed in 1994 by esteemed computer scientist Nick Szabo, are self-executing contracts encoded with predefined terms, executing automatically upon meeting specified conditions. When deployed on a blockchain, they are able to operate autonomously, eliminating the need for third parties and intermediaries. This allows for the automation of many traditional processes, notably financial, within a trustless environment, creating a framework for more efficient, empowered, and secure systems.  

Ethereum is heavily credited with popularizing smart contracts, with the original whitepaper titled: A Next-Generation Smart Contract & Decentralization Application Platform. The release of Ethereum saw a cambrian explosion of smart contract and decentralized application (applications that can operate autonomously through the use of smart contracts) development. These range from ICOs, to complex applications like MakerDAO, Uniswap, and Balancer. Ethereum contracts are generally written in Solidity, a programming language specifically designed to write smart contracts on the blockchain, and deployed on the Ethereum Virtual Machine (EVM). 

It’s important to understand that smart contracts are not without their limitations. This stems from their simplistic functionality, akin to asking "if-then" statements, which can lack the complexity for more sophisticated operations. This has led to the creation of alternative models, such as language-agnostic smart contracts and Internet Computer Protocol's (ICP) ‘canisters’, which aim to address the limitations faced by more traditional smart contracts.  

Other efforts to improve smart contracts focus on scalability, interoperability, and security. The integration of smart contracts with artificial intelligence presents exciting possibilities, enhancing automation and decision-making capabilities within blockchain networks. Additionally, the introduction of oracle services, such as Chainlink and Pyth Network, has allowed smart contracts to interact with and react to real world data, such as price feeds, expanding utility and use cases. 

Integration with Artificial Intelligence:

The integration of smart contracts and artificial intelligence (AI) presents promising synergies, where AI has the potential to inform and enhance the functionality of smart contracts in several ways:

  • Dynamic Decision-Making: AI algorithms can analyze real-time data streams and market trends to inform smart contract decisions. For example, in decentralized finance (DeFi), AI-powered smart contracts can autonomously adjust interest rates or investment strategies based on changing market conditions.
  • Personalization: AI can personalize smart contract terms based on individual user preferences or behavior. For instance, in insurance contracts, AI can tailor coverage options and premiums based on the policy holder's profile and risk profile.
  • Fraud Detection: AI-powered algorithms can detect suspicious or fraudulent activities within transactions. Through this, smart contracts can implement fraud detection mechanisms and automatically trigger actions to mitigate risks.
  • Predictive Analytics: AI can provide predictive insights into future market trends or user behavior. Smart contracts can leverage this predictive analytics to optimize resource allocation, pricing strategies, or investment decisions.
  • Natural Language Processing (NLP): AI-driven NLP technologies can enable smart contracts to interpret and process human-readable contracts or legal documents. This streamlines contract creation and negotiation processes, enhancing efficiency and accessibility.
  • Autonomous Agents: AI-based autonomous agents can interact with smart contracts on behalf of users, executing predefined tasks or negotiations autonomously. This can streamline complex transactions and improve the user experience.
  • Overall, AI algorithms help to enhance the versatility of smart contracts, allowing them to analyze vast amounts of data, inform smart contract decisions, and execute actions based on dynamic conditions, and more. Protocols such as NEAR, Avalanche, and the Internet Computer Protocol (ICP) are arguably pioneers in deploying smart contracts with AI-functionality.

Models for Improvement:

Other efforts to enhance smart contracts focus on scalability, interoperability, and security. There are a number of Ethereum proposals currently under consideration, as well as efforts on other chains to make smart contracts more powerful. Scalability solutions, such as layer 2 protocols and sharding, aim to increase throughput and efficiency, enabling more data to be processed. Interoperability protocols facilitate communication between different blockchain networks, allowing for cross-chain compatibility and usability. Additionally, security enhancements, such as formal verification techniques, utilize mathematical proofs to ensure the correctness and security of smart contracts.

Lesson 28: A roundup

  • Smart contracts, pioneered by Ethereum, automate operations based on predefined logic, operating autonomously on blockchain networks.
  • Their limitation lies in their simplistic functionality resembling basic "if-then" statements, lacking the complexity for sophisticated operations.
  • Integration with artificial intelligence presents exciting possibilities, augmenting automation and decision-making capabilities within blockchain networks.
  • Alternative models, such as language-agnostic smart contracts and Internet Computer Protocol's "canisters," aim to address smart contract limitations by providing more scalable and secure solutions.
  • Efforts to improve smart contracts focus on scalability, interoperability, and security, employing innovative solutions such as layer 2 protocols, interoperability protocols, and formal verification techniques.
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