Smart contracts have been highly beneficial to the digital space. They have powered DeFi systems and the creation of an accessible financial system. Smart contracts have also enabled digital lending to ensure trust between parties. However, despite these numerous benefits, smart contracts are not without challenges.
This article will discuss the concept of smart contracts and why they are still a work-in-progress within the crypto ecosystem.
What are Smart Contracts?
Put simply, smart contracts are digital contracts. They are contracts that run based on written codes. Whenever a smart contract is deployed, the contract is automatically executed when both parties fulfil their obligations under the agreement. For example, if a person decides to lend money to another person, they can deploy a smart contract to withhold the money until the borrower submits collateral. The most common application of smart contracts is on DeFi systems.
Problems of Smart Contracts
There are many problems inherent in smart contracts. They are:
- Complexity: Smart contracts are generally complex. They are based on lines of code that are hardly understandable by an average person. This could create problems when the parties need to understand the elements of the contract or when they need to audit the smart contract. This is coupled with the fact that smart contract protocols are generally challenging to amend. This is why one must pay close attention to the lines of code before the contract is deployed.
- The Risk of Oracles: Because blockchain systems are rarely connected to external systems, it is often tricky for smart contracts to access necessary information. For example, suppose a smart lending contract is created to release funds when the weather plunges to a specific temperature. In that case, the smart contract will be unable to access weather information unless it utilises external systems. These systems are called oracles. However, while oracles have proven to be beneficial to smart contracts, there are risks that they could transmit wrong information to the blockchain. Challenges could arise in cases where a smart contract is executed based on wrong information.
- The tendency of Attacks: Many hackers have begun to explore loopholes in smart contracts to conduct hack attacks and dupe investors. For example, in December 2021, hackers exploited a smart contract bug on the MonoX platform. The hack led to the loss of a whopping $31 million. In another recent attack, a hacker exploited vulnerabilities in the smart contract protocols of Wormhole. This led to the loss of WormHole Ethereum worth about $320 million. These smart contract vulnerabilities are highly dangerous, given that they often lead to significant losses for both crypto exchanges and investors.
As the adoption of DeFi continues to grow, the adoption of smart contracts will get broader. Thus, the identified challenges must be rectified. This would prevent unnecessary losses and also maintain trust within smart contract systems.