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What are Smart Contracts in Blockchain?

Smart Contracts increase transaction security and efficiency; therefore, they are a key component of blockchain technology. Not only that, but it also improves access to other components, such as applications running on different platforms.

How Does It Work?

Smart contracts are protocols or computer programs for automatic transactions maintained on a blockchain and activated in response to the fulfillment of specified requirements. In other words, smart contracts automate the execution of contracts so that all parties can quickly discern the result without needing a middleman or a waiting period.

These are self-executing contracts in which the terms of the buyer-seller contract are written directly into lines of code.

According to American computer scientist Nick Szabo, smart contracts are computerized transaction protocols that carry out contract terms. Szabo created the virtual currency “Bit Gold” in 1998.

Its use renders transactions visible, irrevocable, and traceable.

Advantages of Smart Contracts

Accuracy and Efficiency

The contract is instantly put into effect when a condition is satisfied. There is no paperwork to deal with, and no time was wasted fixing mistakes that might happen when filling out papers by hand because smart contracts are digital and automated.

Trust and Transparency

In this process, no third party is involved, and the people share encrypted transaction records; there is no need to be concerned about altering information for personal advantage.

Security

The encrypted nature of blockchain transaction records makes them extremely difficult to hack. Additionally, hackers would need to alter the entire chain to alter a single record on a distributed ledger since each entry is connected to the entries that came before and after it.

Savings

Smart contracts do away with the need for middlemen and all associated costs and delays.

In What Steps Do Smart Contracts Operate?

A smart contract is a special program that runs on a specialized virtual machine that is integrated into a blockchain or other distributed ledger and encapsulates business logic.

Step 1: Business teams work with developers to specify their standards for the expected behavior of the smart contract in response to specific occurrences or conditions.

Step 2: Simple conditions include payment authorization, package receipt, or a utility meter reading threshold.

Step 3: More advanced logic may be used to encode more complicated actions, such as calculating the value of a derivative financial instrument or automatically disbursing an insurance payment.

Step 4: The developers create and test the logic using a platform for building smart contracts. Once written, the application is forwarded to a different team for security testing.

Step 5: You may use an internal specialist or a business that specializes in evaluating smart contract security.

Step 6: After the contract has been approved, it is used on an already-existing blockchain or other distributed ledger infrastructure.

Step 7: Once the smart contract has been implemented, it is set up to wait for event updates from an “oracle,” which is essentially a cryptographically secure streaming data source.

Step 8: The smart contract runs after receiving the required concatenation of events from one or more oracles.

What Makes It So Important?

Decentralized apps and currencies of all shapes and sizes may be created by developers using smart contracts. They are maintained on a blockchain like any other cryptocurrency transaction and are utilized in anything from new financial tools to logistics and gaming experiences. A smart-contract software is often irreversible once it is put into the blockchain.

Decentralized applications, often known as “dapps,” are driven by smart contracts and contain decentralized financial technology (also known as DeFi), which aspires to revolutionize the banking sector. DeFi apps enable cryptocurrency owners to conduct complicated financial activities, including saving, borrowing, and insurance, from anywhere in the globe without a bank or other financial institution getting a share. Current apps that use smart contracts and are more widely used include:

Uniswap: A decentralized exchange that lets users trade certain types of cryptocurrency using smart contracts without any central body controlling exchange rates.

Compound: A platform that utilizes smart contracts to enable borrowers to get loans promptly and investors to earn interest without needing a bank to act as a middleman.

USDC: A cryptocurrency linked to the US dollar via a smart contract, making one USDC equal to one USD. Stablecoins, a more recent subset of digital currency, including UDDC.

So, how would you use these technologies that are enabled by smart contracts? Consider that you have some Ethereum that you would like to exchange for USDC. Put some Ethereum into Uniswap, which will use a smart contract to locate the best exchange rate automatically, execute the deal, and pay you your USDC. Then, without utilizing a bank or other financial institution, you might put part of your USDC into Compound to lend to others and obtain an algorithmically set interest rate.

Currency exchanges in conventional finance are pricy and time-consuming. Additionally, lending liquid assets to total strangers on the other side of the globe is neither simple nor secure for individuals to do. But all of those scenarios—as well as a wide range of others—are made conceivable by smart contracts.

Smart Contracts: Their Limitations

Smart contracts cannot obtain information about “real-world” events since they cannot make HTTP inquiries. This is intentional. The consensus required for security and decentralization might be compromised by using external data.

Conclusion

Smart contracts can potentially transform how international business and commerce are conducted by speeding up transactions, decreasing bureaucracy, and increasing cost-efficiency. Smart contracts might significantly impact various industries, including the arts, music, real estate, banking, manufacturing, retail, supply chain, and telecommunications. If you’re interested in blockchain and smart contract applications, Kryptomind offers the top smart contract developers you can connect with.

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Learn About Rollup Protocol

The Optimistic Rollup is the key concept that enables optimism. We’ll go through a high-level explanation of how Optimistic Rollups function. Then we’ll describe why Optimism is designed as an Optimistic Rollup and why we feel it’s the greatest option for a system that meets all of our design objectives.

Optimistic Rollups TL;DR

Optimism is an “Optimistic Rollup,” which is a fancy way of saying a blockchain that benefits from the security of another “parent” blockchain. Specifically, Optimistic Rollups use their parent chain’s consensus process (such as PoW or PoS) rather than supplying their own. This parent blockchain in Optimism’s instance is Ethereum.

Block Storage

All Optimism blocks are saved in a special Ethereum smart contract called the CanonicalTransactionChain (opens in a new window) (or CTC for short). Inside the CTC, optimism blocks are stored in an append-only list (we’ll describe how blocks are added to this list in the following section). The Optimism blockchain is formed by this append-only list.

The CanonicalTransactionChain comprises code that ensures that new Ethereum transactions cannot modify the existing list of blocks. This promise, however, can be violated if the Ethereum blockchain is rearranged and the sequencing of previous Ethereum transactions is altered. The Optimism mainnet is built to withstand block reorganisations of up to 50 Ethereum blocks. If Ethereum undergoes a broader reorg, Optimism will also undergo a reorg.

Avoiding such major block reorganisations is a core security aim of Ethereum. Optimism is, therefore, safe from huge block reorganisations as long as the Ethereum consensus process is. Optimism obtains its security features from Ethereum (at least in part) through this link.

Block Production

The production of optimism blocks is generally coordinated by a single entity known as the “sequencer,” who assists the network by offering the following services:

Offering real-time transaction confirmations and status changes.

L2 block construction and execution

L1 is receiving user transactions.

There is no mempool in the sequencer. Thus, transactions are accepted or denied in the order they were received. When a user submits a transaction to the sequencer, it validates it (pays a suitable fee) and then adds the transaction to its local state as a pending block. These pending blocks are frequently submitted to Ethereum in big batches for finalization. This batching approach drastically decreases overall transaction expenses by distributing fixed costs and transactions within a batch. The sequencer employs some rudimentary compression methods to reduce the quantity of data broadcast to Ethereum.

Because the sequencer has priority write access to the L2 chain, it can ensure what state will be completed as soon as it settles on a new pending block. In other words, the consequence of the transaction is accurately known. As a result, the L2 state may be changed consistently and fast. This provides a quick, rapid user experience, with features such as near-real-time Uniswap pricing changes.

Alternately, users can completely omit the sequencer and instead submit their transactions to the CanonicalTransactionChain by means of an Ethereum transaction. One is often more expensive since the user pays the whole fixed cost of submitting this transaction, which is not amortized across many such transactions. However, this alternate submission approach has the advantage of being immune to sequencer censoring. Even if the sequencer deliberately blocks a user, they may still utilize Optimism and use this approach to get their money back.

For the time being, the lone block producer is Optimism PBC.

Block Execution

Ethereum nodes obtain blocks from Ethereum’s peer-to-peer network. Instead, optimism nodes download blocks straight from the CanonicalTransactionChain contract’s append-only list of blocks. For additional details on how blocks are kept within this contract, see the section on block storage above.

The Optimism client software and the Ethereum data indexer are the two main components of Optimism nodes. The Ethereum data indexer (or DTL) rebuilds the Optimism blockchain from blocks submitted to the CanonicalTransactionChain contract. The DTL looks for events generated by the CanonicalTransactionChain that indicate the publication of fresh Optimism blocks. It then looks at the transactions that generated these events to recreate the published blocks using the typical Ethereum block format.

The Optimism client program, the second component of the Optimism node, is a nearly vanilla version of Geth. This implies that behind the hood, Optimism is nearly identical to Ethereum. Specifically, Optimism and Ethereum share the same Ethereum Virtual Machine , account and state structure, gas metering system, and fee schedule. This design is known as “EVM Equivalence”, and it implies that the majority of Ethereum tools (including the most complicated ones) “simply work” with Optimism.

The DTL is constantly monitored by the Optimism client program for freshly indexed blocks. When a new block is indexed, the client program downloads it and performs the transactions contained inside it. To execute a transaction on Optimism, use the identical steps as on Ethereum: first, load the Optimism state, then apply the transaction against it. Finally, record the state changes that arise. This method is then repeated for each new DTL-indexed block.

Bridging Assets Between Layers

Optimism allows users to transmit arbitrary messages between Optimism and Ethereum smart contracts. This allows assets, especially ERC20 tokens, to be transferred across the two networks. The precise technique by which this communication takes place varies based on the direction in which information is transmitted.

This capability of the Standard bridge is used by Optimism to enable users to transfer assets (ERC20 tokens and ETH) from Ethereum to Optimism. Users can withdraw the same assets from Optimism and send them back to Ethereum. 

Transitioning from Ethereum to Optimism

Users merely need to activate the CanonicalTransactionChain contract on Ethereum to generate a new block on the Optimism block to convey messages from Ethereum to Optimism. For further information, see the section on block creation above. Blocks that users generate may include transactions that seem to come from that address.

Moving from Optimism to Ethereum

In the same manner that Ethereum contracts may easily produce transactions on Optimism, this is not feasible for contracts on Optimism. As a result, returning data from Optimism to Ethereum requires a little more effort. We need to be able to make verifiable claims about the optimism of Ethereum-based contracts rather than automatically producing verified transactions.

Making claims about the state of optimism that can be proven needs a cryptographic commitment in the form of the trie’s root. This commitment will alter after each block since optimism’s status is changed. Approximately once or twice per hour, a smart contract on Ethereum called the StateCommitmentChain publishes commitments.

Users can use these promises to produce Merkle tree proofs regarding the optimistic situation. Ethereum smart contracts can verify these proofs. The L1CrossDomainMessenger, a handy cross-chain communication contract that Optimism manages, may validate these proofs on behalf of other contracts.

These proofs may support verifiable claims regarding the information stored in any contract on Optimism at a particular block height. Then, using this fundamental capability, it will be possible for contracts on Optimism to communicate with contracts on Ethereum. Contracts on Optimism can utilize the L2ToL1MessagePasser contract (predeployed to the Optimism network) to store a message in the state of Optimism. Users may then demonstrate to Ethereum contracts that a certain Optimism contract wanted to deliver a specific message by demonstrating that the L2ToL1MessagePasser contract has saved the message’s hash.

Fault proofs

Fault proofs Instead, for a while, these promises are regarded as pending (called the “challenge window”). A proposed state commitment is deemed final if it is not contested during the challenge window, which is presently set to seven days. On Ethereum, smart contracts may securely receive evidence about the status of Optimism based on a commitment after it is deemed to be final.

When a state promise is contested, a “defect proof” procedure—previously known as a “fraud-proof” method—can be used to render it invalid. If the challenge is successful, the commitment is withdrawn from the StateCommitmentChain, at which point another proposed commitment will take its place. It’s crucial to understand that only the publicly available promises on the status of the chain are reversed by a successful challenge, not Optimism itself. A fault-proof challenge leaves the transaction sequencing and optimism unaltered.

The November 11th EVM Equivalence update is adversely influencing the fault-proof process, which is now undergoing significant rebuilding. The Protocol specifications area of this website has further information about this procedure.