A smart contract is a type of blockchain application that performs transactions and other processes according to a set of rules defined within the program's code. The contract executes automatically if its terms are met; it doesn't depend on a person, institution or other third-party intermediary.
Many people associate smart contracts with cryptocurrency platforms, where the technology supports crypto exchanges, non-fungible tokens and stablecoins. But smart contracts also have the potential to automate any number of conditional transactions, such as real estate title transfers, intellectual property access, stock trades, supply chain management processes and voting.
Smart contract benefits
Smart contracts offer a variety of quantitative and qualitative benefits, including the following:
- Accuracy. If the terms of an agreement are satisfied, then the smart contract executes automatically, minimizing the types of human error common at this stage of traditional, manual transactions.
- Autonomy. Because smart contract execution occurs automatically, the parties involved in an agreement don't have to trust each other to take the contractually appropriate actions. Smart contracts' ability to self-execute under preestablished conditions also eliminates the need to involve third parties, such as brokers, lawyers or other middlemen.
- Cost savings. By eliminating the need for individual or institutional intermediaries to facilitate transactions, smart contracts can generate significant cost savings for enterprises.
- Security and transparency. Smart contract records are encrypted and -- because they run on blockchain -- theoretically immutable, with limited potential for manipulation or fraud. In a distributed ledger such as blockchain, decentralized computing nodes process, verify and maintain information in consensus with each other, making records nearly impossible to lose and difficult to alter. Each party involved in a smart contract also has ongoing, real-time access to transaction records, ensuring a high degree of transparency.
- Speed and efficiency. Smart contracts' automatic execution means even complex, multiparty transactions can happen immediately, without traditional paperwork and processing delays.
Smart contract best practices
In many ways, a smart contract is more secure than a traditional transaction that relies on human execution, but, as a form of software, it is susceptible to cybersecurity vulnerabilities. In fact, according to an estimate from blockchain provider Ethereum, attacks and vulnerabilities have resulted in more than $1 billion in cryptocurrency losses.
Some established best practices can help keep smart contracts secure. It's worth noting, however, that implementation details may vary considerably from one blockchain provider to another. With that in mind, be sure to get information about a platform's security features before choosing a provider.
Consider the following best practices to help maximize smart contract security:
- Keep the contract simple. This is a sound practice for any contract, smart or otherwise, because it minimizes the likelihood of someone misunderstanding, misinterpreting or manipulating the terms of the agreement. Clarity and conciseness are particularly important in smart contract development, because complexity generally makes it more difficult to identify and fix problems in both business logic and code.
- Follow secure software development practices throughout the contract's lifecycle. Developers must go to great lengths to ensure a smart contract is secure before launching it into production. In many cases, it's impossible to correct errors in a live smart contract, as blockchain's immutability makes it inherently unconducive to patching.
It's important, therefore, to shift left as much as possible and pay close attention to security from day one. This includes the following:
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- Design smart contract software so it has the smallest possible attack surface.
- Look for loopholes in the smart contract's business logic and programming rules that attackers could exploit.
- Implement the principle of least privilege and principle of least functionality to limit unnecessary user access and latitude.
- Follow secure coding guidelines.
- Scan all code for vulnerabilities.
- Vet for common smart contract vulnerabilities and implement any necessary fixes.
- Perform extensive contract testing and carefully examine any unexpected results. Use testnets, blockchain testing-only networks that mirror their production counterparts.
- Be mindful of supply chain security. In software development, conventional wisdom dictates new code is likely to have more vulnerabilities than existing code that others have already heavily reviewed and used widely. From a security standpoint, many developers therefore prefer to reuse well-vetted code modules, libraries and other components than to write their own from scratch.
Remember, however, that existing code can still have security vulnerabilities. Be sure to keep track of any code you reuse and monitor sources for vulnerability announcements and code updates. And when a new vulnerability emerges, act quickly to address it.
- Commission a smart contract audit. Independent audits can help catch flaws in smart contracts' business logic and code that developers missed.
- Plan for the worst. No matter how well-crafted a smart contract is, things could still go wrong. Make sure to build error-handling routines into the contract, as well as emergency mechanisms to throttle or stop transactions altogether if necessary.
- Monitor the smart contract's operation. Every smart contract should record pertinent events in well-protected logs. Those logs should have careful, constant monitoring to identify operational problems, signs of attacks and any other issues that merit immediate action. Monitoring and emergency intervention mechanisms should rely primarily on automation. A serious attack could happen so quickly that waiting for human action would be disastrous.