Plenty of smart contract challenges remain, but developers and technological advances are making progress.
What you will learn
The legal field presents significant hurdles for wider smart contract use.
The Hyperledger project is one example of overcoming security concerns.
Oracles, usability and scaling also present challenges.
Since the rise of blockchain technology, smart contracts have been sweeping the digital world. Smart contracts execute automatically and have the potential to increase equity by using a peer-to-peer network to store contract information and act on it more efficiently than traditional methods. There can be no adjustments or bribery in this system, only code. High-quality smart contracts also have the potential to reduce transaction costs by removing unnecessary intermediaries from contract development and execution. However, along with all the potential, there are considerable smart contract challenges.
Industries are turning to face and embrace smart contracts as a new tool to increase accuracy and reduce fees for many of their agreements. Logistics and shipping, insurance, charities, agriculture, healthcare, energy, and the financial sector are all adapting to smart contracts. In agriculture, they can be used to trace products from farm to table. In logistics, smart contract execution helps to drive supply chain management.
But smart contracts are far from ubiquitous. From the intricacies of coding to the exchange of tangible goods, many issues need to be remedied before we can expect to see smart contract development on a universal scale. Let’s explore the primary issues they face and where researchers can propose solutions.
Security of smart contracts has been a primary focus in research and development at least since the infamous hack of 2016 when Ether worth about $60 million at the time was drained from The DAO by a hacker who took advantage of a vulnerability in the code.
Smart contracts take advantage of distributed ledger technology on blockchains. They are, by nature, open-source and publicly readable. The question smart contract developers and researchers face is: How do we increase security for smart contracts without increasing costs?
By using a peer-to-peer network, contracts are open to threats like event-ordering bugs and reentrancy bugs, where hackers can inject malicious data for their desired outcome. Usually, to gain a profit.
Different possibilities for controlling security exist, and new software technology innovations continue to develop. Among the recent technical advances:
The Hyperledger blockchain project has developed private, contained environments for different industries. Its privacy controls will share only the data you want to be public and will share it only among “permissioned” network participants.
Increasing the use of cryptography could make data public, but legible to only those involved. Layering cryptography software onto a smart contract is costly, however, undermining part of the appeal of smart contracts.
Another alternative is to create hybrid solutions for data storage. Such smart contracts use some external data repositories combined with selective use of cloud computing, instead of relying fully on the blockchain. This can also decrease costs. Blockchains themselves can be pricey to maintain, and using them selectively may increase security and cost efficiency.
Hedera's SDKs give individuals and businesses tools they need to address security and compliance issues while building robust systems. For example, in financial applications developers can incorporate KYC (know your customer) and AML (anti-money laundering) into their systems without involving a centralized entity.
Smart contracts have the potential for accelerating cross-border transactions of finances, goods, and services while removing middlemen. However, smart contracts must abide by the different nations’ laws, and even then, it can be difficult to ensure that they will be respected across countries. Governments eventually may also want to regulate these transactions and agreements, upending the purpose of using peer-to-peer networks by defaulting back to a third party vetting the process.
Other roadblocks stall the use of smart contracts. Another key feature of smart contracts is their immutability. Once the agreement is made and contract code is solidified, there is no simple way to undo or adjust it. So, if there is a change in law or the two parties come to a new mutual agreement, what then? Likely, the smart contract would have to be aborted and a new one created. And that can be costly.
Then there’s the issue of data. For simple legal contracts like marriage certificates, digitization is easy. For industries with quantifiable data, like finances or agriculture, smart contracts can be codified relatively simply. But not all contracts use quantifiable measures—so how can they be computed?
There are also some major international laws that impede broader legal use of smart contracts. For example, the European Union agreed to the European General Data Protection Regulation that ensures that citizens have a "right to be forgotten." They can demand the erasure of digital information about them. But if a citizen is bound to a digital legal agreement, they feasibly can’t be forgotten.
Additionally, for smart contracts to be legally sanctified, perhaps the public needs to gain a greater understanding of coding. Will judges have to learn smart contract language to preside over digital cases?
“Oracles” are the data sources that smart contracts rely on to see that some of the criteria of a contract are met. They might be the weakest link in manipulating a smart contract. If any node of a contract’s blockchain is hacked, it can log falsified data that then becomes immutable in the distributed ledger, potentially triggering the automated execution of the smart contract’s outcome.
In the long run of smart contract applications, policies will have to be created to account for erroneous data in the constrained running environment that hosts the oracles. Problems can arise from glitches in machinery, bugs from hackers, or situations when the environment prevents the oracle from collecting or sharing data. Or, over time, an oracle company could simply go out of business and cease to collect and distribute information.
Because of the design of smart contracts and their very specific applications, developing smart contracts requires specialized software engineering skills.
Unlike traditional software development, smart contracts require developers to have business knowledge and understand non-traditional programming languages, primarily Solidity. They also must comprehend formal methods of cryptography and networking.
It’s imperative that smart contracts are coded correctly for security reasons. Some developers have proposed new smart contract languages, while others work on creating software that can "fact-check" the code to make sure it does what it’s supposed to do. Even for functional smart contract code, software won’t read for bugs or vulnerabilities. So strong technical knowledge and proper coding from the start is the greatest insurance against attacks.
Lastly, there’s the issue of scale. Visa at present can handle around 24,000 transactions every second. Ethereum, the largest blockchain for smart contracts, can handle only 14 transactions a second. To increase the impact and efficiency of smart contracts in our society, the speed of information sharing on the blockchain needs to accelerate, the security needs to be bolstered, and its accessibility to coders and the public alike needs to increase.
Though current snags with smart contracts complicate their use, the potential for research and development are massive. And according to a 2021 study, the amount of research every year into smart contracts’ issues and solutions is quickly increasing. Incrementally, we can see research gaps close and technical challenges get resolved.
As smart contracts evolve, so does Hedera.Hedera Hashgraph offers a low-cost, proof-of-stake public ledger with quicker-than-average transaction speeds. Using the Ethereum Virtual Machine, Hedera is optimized to develop advanced and customized smart contract code in Solidity.