Smart Contract – Importance And Epoch-making Role!

From the 2010s, Smart contracts – which were advocated in the 1990s – will gradually get the whole spotlight along with the growth of blockchain technology in general. Ethereum blockchain has become the trigger one.

With the appearance of Ethereum, some applications (Dapps – Decentralized applications) have been added to crypto assets, which were merely means of remittance and payment. As a result, services and platforms originating from Ethereum, such as NFT, DAO, DeFi, and DEX, were born one after another, attracting the attention of investors and wealthy men from all over the world, and a lot of funds flowed in due to the future potential. A big Ethereum ecosystem has been built as a result. In addition, blockchains equipped with Smart contracts, such as Polygon, Ethereum’s second layer, and Solana, the famous one often called an Ethereum killer, have been developed and have grown to surpass Ethereum.

About Smart Contract

Firstly, let’s explain the basics of smart contracts.

What is Smart contract?

Various economic and social activities are based on legal contracts, and all plans and actions are carried out according to the rules set by the agreements in the contract. In modern society, such as real estate transactions, construction, manufacturing, renting, buying and selling, and employment, normal organizational management, national and local governance, and the formation of various communities are impossible without contracts.

“Smart contract” means to automate all the above contracts, and the mechanism is mainly constructed by programming. Smart contracts are the concept advocated by computer scientist Nick Szabo in 1994, but the term has been used frequently in recent years only in the areas of “Blockchain”. Specifically, it means that the program is automatically executed according to predetermined rules, starting from transactions on the blockchain platforms or other external information.

Ethereum’s Main Protocol

Ethereum is equipped with smart contracts as a blockchain protocol for crypto assets. Bitcoin, which had been released before, also had smart contracts, but it was not worth the attention because it was beyond the scope of remittance and trading. However, in the Ethereum area, there was a “EIP (Ethereum Improvement Proposals)” where developers from all over the world solicited proposals in an open space, and with the launch of Ethereum, innovative actions were taken in rapid succession. The most important is the development of a smart contract standard called “ERC (Ethereum Request for Comments) 20” released in 2015, and the number of tokens using it. Until then, crypto assets were incompatible because they were operated according to the developers’ set standards, and in order to ensure compatibility on exchanges and wallets, additional work was required to implement a different program. In order to prevent these problems and improve convenience, many users and engineers have called for standardization, and the unified standards for smart contracts called “ERC20” were developed to meet those needs.

All tokens created using ERC20, the 20th proposed and developed in EIP, are compatible, such as Tether, Chainlink, Binancecoin (BNB), DAI (DAI), etc. Cryptocurrency assets that may break later will be born one after another. And by utilizing the crypto asset blockchain based on these ERC20 standards, various performances such as voting, crowdfunding, fee settlement, etc., can be automatically executed without the intervention of a centralized administrator.

ERC721’s Epoch-making Role

ERC20 creates all the same Fungible tokens as currencies and stocks. For example, Mr. A’s 100 JPY and Mr. B’s 100 JPY have exactly the same value, and even if they are exchanged or handed over to someone else, they are still the same 100 JPY. This is “Fungible”. About two years after this ERC20, the “ERC721” was developed in 2017. What is remarkable about ERC721 is that it is possible to develop “non-fungible” tokens. The smart contract installed in the ERC721 has the function of proving unique ownership by linking it with digital data such as videos, images, and music. As a result, “NFT (Non-Fungible Token)” was born.

In the first place, digital data can be easily copied by anyone by a device. No matter how good the digital art is, it can be duplicated as many times as you like, so once it was copied, it was not possible to prove which one was the original. However, the ERC721 standard smart contract made it possible. Originally, ERC721 was developed for the NFT game “CryptoKitties” launched in 2017. The epoch-making characteristic of this game is that not only can you enjoy breeding cats, but you can also buy and sell those cats as NFTs, as the only character that each player has.

The birth of ERC20 was welcomed by many people involved in Ethereum and became a hot topic, but it was ERC721 that made an impact. With the release of ERC721 in 2017, NFTs were suddenly becoming popular, but in 2021, when NFT art is traded at a high price, it will suddenly become a phenomenon. Along with this, the price of Ethereum increased about four times in just half a year, more than five times in the latter half of autumn, and at one point it soared to nearly 560,000 JPY, marking the highest price ever. Ethereum’s smart contracts will allow other platforms such as DEX (Decentralized Exchange), DAO (Decentralized Autonomous Organization), and DeFi (Decentralized Finance) to trade in the absence of centralized managers for a short period of time. Moreover, they are not functioning alone, but by merging with others, and they are steadily building the Ethereum economic zone, which would be the main axis of Web3.0.

Differences Between ERC721 and ERC1155

ERC1155 is also the standard one that is drawing attention in ERC. The features of ERC1155 are easier to understand than those of ERC721. For example, in the case of NFT games, the ERC721 smart contract had no choice but to list the NFT characters and items in the game individually on the marketplace. The Ethereum blockchain has a “scalability problem” in which the fee (gas fee) charged at each transaction is by far the highest compared to other crypto assets, and the transaction speed is delayed. With ERC721, even if you want to list all characters, you can only list them one by one, so you will have to pay a fee each time. This would increase the gas fee, which would not only impose a burden on many users but could also be a barrier to entry. Therefore, ERC1155 was newly developed. With the ERC1155 smart contract, you can list NFTs in bulk on the marketplace, which not only speeds up transactions but also keeps gas costs low. Furthermore, not only NFTs but also several types of tokens, including Fungible tokens, can be sent to multiple addresses at once, ensuring unprecedented convenience. Because of these features, the ERC1155 is also known as the “multi-token standard.”

When highly functional standards such as ERC20, 721, and 1155 are developed and released, tens or hundreds of thousands of tokens are developed and disappear in a short period of time. However, among them, crypto assets that have been highly evaluated by influential investors and wealthy people remain in the market, and we are repeating the movement to raise a large amount of funds and form new projects. In the world of crypto assets, there is no perfect system, so it is quite possible that new ERC standards with higher utility value and effectiveness will lead to further innovation. Ethereum and related services are rapidly becoming more connected to the Metaverse. Keep an eye on future trends, including the rise of crypto assets equipped with smart contracts other than Ethereum.

In Conclusion

Smart contracts are indispensable for building distributed networks using blockchain, which will play a leading role in Web3.0. Blockchain still has a strong image of crypto assets in the world, but in reality, it is the construction of supply chains centered on finance, manufacturing, entertainment, art, etc. There is a wide variety of usage, including examples where electronic medical records are managed by blockchain.

The potential of smart contracts is immeasurable, and we are all looking forward to the widespread penetration of an ecosystem that is safe, convenient, speedy, and functions without human intervention.

At Relipa, we are developing blockchain-related services and products. If you are thinking of DX using blockchain such as NFT, DeFi, Metaverse, please let us be your partner. Contact us now because our experienced engineers are looking forward to hearing from you.