On this episode of the Crypto Coin Show, Smart contracts part 2. blockchain security. If you missed Smart contracts part 1 its in the description box below, and in this overview a bit deeper in smart contracts with a look at how the blockchain affects how smart contracts work, the benefits and limitations of smart contracts on the blockchain and why specific blockchains can make or break your contract.

So hopefully by now, you have a basic idea of smart contracts, or at least heard it is a buzz word right now and are eager to learn more. To sum up the basic definition, Smart contracts are essentially just contracts but with better technology and are more appropriately serving the growing business needs of international companies.

But now let’s focus on the blockchain, where a smart contract code is executed and the place where the actual code resides as it sits there indefinitely. What really is the difference between hosting a contract in some legal file on the lawyers shelf, hosting it on a centralized server at their office, or hosting it on the blockchain?

The first thing you need to understand is that smart contracts work so well on the blockchain because they allow you to integrate a payment system that can interact directly with the contract, and those payment systems are built into ethereum blockchain. The ability to interact using a payment system anywhere around the world is critical to the usefulness smart contracts in international business. For this reason alone, smart contracts are more efficient when executed on a blockchain rather than on a centralized file server. For this purpose of simplicity, I am going to focus on smart contracts on the ethereum blockchain, but later I will discuss how different blockchains can also be used.

So passed the financial interoperability of the contract also lies the security aspect. Which is more secure, hosting the file on a server or on the blockchain? While hosting a contract digitally on a centralized server is more efficient than having a paper copy because it can be distributed easily to parties across the world, there are still vulnerabilities in storing contracts on a centralized server. Centralized servers have single points of failure that attackers could point attacks to, whereas blockchains do not have a single point of failure, as a copy of the contract would be distributed across all of the nodes verifying within the ethereum network. It is a bit complex, but essentially the fact that ethereum has a payment network integrated into the blockchain and miners validating transactions occurring on the chain, it is designed in such a way that it is very hard to try to hack the system and send a fake transaction to a smart contract impersonating one of the parties privy to the original contract. Essentially, unless you own 51% of the mining power for ethereum, any attempt to fake the system will result in the attackers losing much more resources than they have to gain. And the more nodes verifying transactions on the blockchain, the harder it becomes to penetrate and ethereum currently has the most nodes validating it then any other blockchain. As well, the amount of transactions per day has gone up ten times each year since its inception, from 5 thousand per day, to 50 thousand, and then 500 thousand by the end of 2018.

Not only does the blockchain have more security, but it can be accessed regardless of your location in the world, unlike a centralized server. Although it seems weird that it can be accessed easily around the world, any sensitive information in the contracts will be encrypted information so it could not be read without the proper security permissions.

Now most smart contracts are generally hosted on the Ethereum blockchain, but other blockchains are also implementing the ability to create and execute smart contracts like NEO, Stellar, EOS, Rchain, and Cardano. There are also projects working to bring smart contracts on top of the Bitcoin blockchain like Counterparty and rootstock to give Bitcoin more functionality. Hosting smart contracts on these other blockchains will have different levels of security, interoperability, programmability, scalability, and functionality. Expect to see a lot more platforms coming out that can also host smart contracts, but it may be hard for any other them to be adopted in the mainstream because to become popular they will need to grow faster than ethereum which is growing ten fold each year. In my future videos I’ll dive deeper into smart contracts on different blockchains.

There is also the case of running smart contracts on a private blockchain versus a public blockchain. Now what is the difference? Private blockchains are smaller blockchains that are set up with a limited number of verifiers such that together they control the transactions occurring on the blockchain in a centralized manner. Many organizations in the Enterprise Ethereum alliance are working on private blockchains which could be useful for non-arms reach transactions and hosting secure files like smart contracts. But understand something important, a private ethereum blockchain has nothing to do with the actual public ethereum blockchain, besides sharing the name. transactions will not be posted to the ethereum public blockchain, and essentially the currency is not Ether being used to transact, you might as well call it something different. It does however apply the same distributed ledger technology and allow you to have a slightly wider distribution than a centralized server. However if you hosted a smart contract on some organizations or governments private blockchain, they essentially have the ability equivalent of more than 51% of the mining power of a public blockchain, and could change the underlying rules regarding how that chain works and even the validity of the smart contracts on the chain, and it truly isn’t immutable as the ethereum public blockchain is.

Lastly, I want to touch in this article on the scalability of blockchains and how this affects smart contracts. A blockchain is really only as efficient as it is scalable. When the Ethereum blockchain was backed up from Cryptokitties producing too many transactions, it puts the rest of the transactions in the world to a hault. So currently if we have implemented important smart contracts on the ethereum chain and we need to make an interaction to the contract while the network is busy, it could essentially not be interoperable for hours or even days. This poses a potential setback to the international business world. While Ethereum can only handle as much as 30 transactions per second right now, they are working on a few protocols to scale that up to thousands per second and even millions. If another blockchain supporting smart contracts comes up with a scalability solution and it works well for smart contracts, they may because the next primary platform for implementing contracts.

Well, I think that is enough for smart contracts in this lesson. In Summary, blockchains make all the difference in where the smart contracts are hosted. Is it on a decentralized server, or a centralized private server or private blockchain? Is it on a scalable blockchain? And how do you see smart contracts evolving as distributed ledger technology grows? Leave your thoughts in the comments section down below.

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I’m Ashton Addison and Thank you for watching. Remember to like, share, and subscribe to Crypto Coin Show to see my next video when I Decrypt the facts, to keep you on track in the crypto world.