Smart contracts development: opportunities, risks and strategy

Recent history has been able to show some examples revealing these obstacles: in 2016, a flaw in the Smart Contract of the Dao on Ethereum allowed the misappropriation of $ 50 million, while the popularity of cryptokitties in 2017 congestioned the Ethereum network, exposing its operational limits. In a market, however projected at 73 billion dollars by 2030 (WEF), these incidents illustrate the challenges of a technology still very young but crucial for the digital world of tomorrow.

To guarantee a secure and lasting adoption of smart contracts, it is imperative to combine technical innovation, legal supervision and economic resilience. In this article, we will explore these challenges and try to offer concrete strategies to meet the expectations of professionals in the blockchain industry. 1) Technological risks a) The accuracy of the code, the double -cutting sword the smart contracts derive their effectiveness from their precision, but this characteristic can also prove to be their main “Achilles heel”. Unlike traditional contracts, which give way to human interpretation, smart contracts do not tolerate any gap in their coding. A simple error can have important consequences. The emblematic example remains the hacking of a DAO in 2016, where a flaw in the code allowed the misappropriation of $ 50 million in ETH. More recently, similar bugs have been exploited in the Defi ecosystem, showing the potential vulnerability of a poorly coded contract. However, according to Chainalysis, the value lost during the hacks of decentralized finance (DEFI) decreased by more than 63 %, which shows a real positive trend to reduce the impact of these incidents. To reduce these risks, several tools and good practices have imposed themselves. The formal verification, which consists in mathematically analyzing the code to ensure its accuracy, has become essential above all deployment. At the same time, regular audits by third -party experts guarantee double validation. Finally, the adoption of common standards, such as ERCs (Ethereum Request for Comments) for Tokens Ethereum, facilitates a more reliable and interoperable development base. Also, the latest advances in artificial intelligence will eventually improve this resilience. Problems related to coding or non-imprisonment of essential parameters can be identified more quickly both upstream of the deployment and when discovering a flaw. More simply, it is clear that the recurrence of the faults that have occurred in the short history of this technology are excellent opportunities to learn, understand and create new security, to improve the resilience of protocols and the ways of preventing such problems arising again. b) Blockchains safety as a basis of confidence The smart contracts are based on the blockchain infrastructure that houses them, which makes it a central dependence. Although the advantages of the use of blockchain are plethoric (transparency, speed, traceability), the security of the latter, whether public as Ethereum or Private, plays a decisive role in the reliability of smart contracts. However, these networks are not infallible. Errors in consensus mechanisms, network overloads or type 51 % attacks (where a malicious group takes control of the majority of calculation power), represent rare threats but to be taken into account. Vulnerabilities specific to certain blockchains, such as bugs in updates or unforeseen forks, can even affect thousands of contracts at once. To strengthen this base of confidence, several strategies can be implemented. The integration of early alert systems to detect network anomalies is crucial. The anti-hack mechanisms, the financial penalties integrated into the protocols to discourage attacks, or the “Bug Bounty” programs which allow ethical hackers to be rewarded in exchange for the search for faults are developing more and more. More simply, good communication and good circulation of information between developers of Smart Contracts and teams responsible for blockchains strengthen collaboration around security. 2) Legal risks a) The ambiguities of the rules under construction The legal framework surrounding the smart contracts is still in the construction phase, and the rules vary considerably from one jurisdiction to another. This absence of international harmonization creates a fragmented and uncomfortable legal environment for companies wishing to adopt this technology. For example, what is legal and enforceable in Europe may not be in the United States or Asia, which causes uncertainties to the validity of automated contracts in a context of cross-border use. Another major challenge lies in the application of traditional rules to smart contracts. The latter, once deployed on a blockchain, are in principle immutable, which complicates their modification in the event of error or dispute. Unlike conventional contracts that can be revised or renegotiated, smart contracts must integrate mechanisms from their design to manage unforeseen events, which raises questions of compatibility with conventional contractual law. b) Anticipate the regulatory framework: a strategic necessity in the face of these challenges, anticipating the evolution of the regulatory framework has become a priority for players in the sector. In Europe, initiatives like Mica (Markets in Crypto-Astets Regulation) show a desire to supervise blockchain technologies, but smart contracts do not yet benefit from a truly dedicated framework. In the United States, approaches are currently fragmented between federal states, while in Asia, certain nations, such as Singapore, adopt proactive measures to promote innovation while protecting users. Sectoral organizations, such as the FFPB, have a crucial role to play in this context. They can act as professionals of professionals with regulators to plead in favor of a balanced legal framework, which protects users without braking innovation. These groups can also offer shared standards and practices to help standardize rules internationally. Finally, a promising track lies in the integration of specific clauses within the smart contracts themselves. These clauses could allow, for example, the temporary suspension of a contract in the event of a dispute or the intervention of a third party authorized to pay a disagreement. These innovations would combine the flexibility of classical law with the effectiveness of automated contracts, thus making it possible to strengthen their adoption in regulatory environments that are still as complex. 3) Economic and operational risks: The fragile balance of ecosystems a) Scalability and economic efficiency: an absolute priority The example of cryptokitties in 2017 perfectly illustrates these limitations. This game based on smart contracts, allowing you to buy, sell and have digital cats reproduce, was a dazzling success. Result: saturation of the Ethereum network, causing a generalized slowdown in transactions and an explosion of gas costs. This event has shown that the current architecture of Ethereum could not manage a massive influx of users without a degradation of performance. Ethereum’s update should provide a more robust solution to this type of flaw in the future. The other striking case was that of Makedao in March 2020. During a fairly brutal fall in the Crypto market, the smartdao contracts, supposed to guarantee the stability of the DAI (Stablecoin backed by collaterals in cryptocurrencies), could not react fairly quickly to extreme volatility. This failure has led to forced liquidation of assets at derisory prices, causing significant financial losses for users and highlighting the inability of certain protocols to adapt to brutal market fluctuations. Faced with these past examples, several solutions have emerged to improve the scalability of blockchains and therefore by extension of smart contracts and thus limit the negative economic impacts of business: Layer 2-type solutions like technologies such as Optimistic Rollups and ZK-Rollups allow to execute transactions outside the main blockchain (or Layer 1) before consolidating them Thus congestion and transaction costs. Ethereum himself relies on these solutions to solve his scalability problems with projects like Arbitrum and Starknet. Migration to more efficient blockchains: certain platforms, such as Solana, Avalanche or Polkadot, offer faster and less expensive infrastructure, capable of accommodating smart contracts without undergoing the limits of Ethereum. These alternatives, however, raise the question of interoperability between channels and necessarily generate a risk of market fragmentation. Improving the economic mechanisms of smart contracts via more advanced protocols that incorporate adaptive models, capable of dynamically modifying their costs or parameters according to market conditions. Although being more complex, the latter would avoid dysfunctions like those observed on Makerdao. Conclusion: Smart Contracts offer major transformation prospects for many sectors, but their large -scale adoption is based on the ability to meet the challenges of technical, legal and economic. History has already proven that safety flaws, the absence of a clear regulatory framework and scalability limitations can hinder their development and limit user confidence. However, new solutions are emerging to respond to this: rigorous audits, integration of suitable legal mechanisms, technological improvements such as Layer 2 solutions or new, more efficient blockchains. These advances demonstrate that a balance between innovation and security is possible, provided that all the players in the ecosystem – developers, businesses, investors and regulators – are jointly working to strengthen the reliability of smart contracts. It is with this in mind that the FFPB invites professionals to share their feedback, their needs and their concerns. By relaying these elements to decision -makers and regulators, we will be able to contribute to the development of a secure and adapted framework, guaranteeing a lasting development of this technology. Building a trusted environment for smart contracts is to offer them the best chance of establishing themselves as an essential standard in the digital economy of tomorrow. Source: World Economic Forum Non-Responsibility Notice Notice Non Responsibility: In accordance with the directives of The Trust Project, Beincrypto undertakes to provide impartial and transparent information. This article aims to provide exact and relevant information. However, we invite readers to verify the facts of their own and consult a professional before making a decision on the basis of this content.

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