The decentralized finance (DeFi) markets may have cooled off over the last year, but the technology that powers these applications continues to advance. In particular, smart contract platforms that enable transactions via DeFi applications are maturing to meet the requirements of businesses.
While it is true that companies have already shown interest in DeFi use cases, the limitations of smart contracts have made their adoption difficult. A report published by Grayscale Research in March puts this into perspective, noting that “despite handling millions of transactions a day, smart contract platforms in their current state would be incapable of handling even 10% of the world’s internet traffic.” .
This notion is especially problematic when considering the market opportunity behind DeFi. For example, Grayscale Research report mentions that DeFi and Metaverse applications combined are likely to have a much larger market capitalization than the current digital asset market.
How smart contracts are advancing
Given this potential, it is clear that smart contracts must move forward to accommodate growth. John Woods, CTO of the Algorand Foundation — the blockchain ecosystem support organization of the same name — told Cointelegraph that current smart contracts have a number of technical restrictions, such as scalability issues, which have resulted in slow transaction time and the inability to process complex computations.
Woods shared that smart contracts uploaded to the Algorand blockchain primarily apply to traditional DeFi use cases enabling things like automated trading of digital assets on-chain. Nevertheless, When it comes to enterprise use cases, Woods believes it’s best to put as little information as possible on-chain.. He said that:
“I have previously worked with large companies that wanted to run DeFi use cases like post-trade settlement on a blockchain network. When I built those enterprise applications, I only left the most important pieces of information on-chain. smart contracts will work efficiently without having to do heavy on-chain computations.”
According to Woods, this methodology allows companies to benefit from smart contacts, but only when it comes to simple calculations. Although this can serve as a solution to the current limitations, progress is being made to ensure that all company data can be supported by smart contracts.
For example, Scott Dykstra, CTO and co-founder of Space and Time — a decentralized data platform — told Cointelegraph that his firm is building a community-operated off-chain data platform that can handle any workload on a single cluster.
“We are working to allow developers to run queries against data we have indexed from all major blockchains and data uploaded from any off-chain source,” he said. After the queries were executed, Dykstra explained that Space and Time uses a novel proprietary cryptography, known as “Proof of SQL”, which can prove that the result of each query is accurate and that the underlying data has not been tampered with..
This is an important point, as Dykstra pointed out that enterprise data queries typically run on off-chain data warehouses. But, as these data stores are centralized, query results are often not trusted by a smart contract and can therefore lead to throttling.
Since Space and Time can cryptographically prove that each data query result is accurate, Dykstra explained that this allows complex calculations to be plugged directly into smart contracts without limitations.
“Space and Time’s ability to plug analytical query results directly into smart contracts (with cryptographic guarantees), will serve as a trustless intermediary between enterprise data and limited blockchain storage.he said. In turn, this process will automate more complex business logic for enterprise use.
Although this solution allows complex data to be processed using smart contracts, privacy concerns remain.. Paul Brody, global blockchain lead at Ernst Young (EY), told Cointelegraph that While the value proposition of smart contracts for businesses is huge, so are the hurdles.. He said that:
“The biggest problem is privacy: public blockchains do not natively support privacy. Since companies consider their purchase agreements to be sensitive information, no company will deploy these solutions until they trust the privacy approach.”
Woods is also aware that companies are hesitant to use smart contracts due to privacy concerns. “Everything currently done through a public blockchain network is transparent, but business use cases require some level of privacy.. What’s coming now is privacy in smart contracts,” she said.
Therefore, Woods shared that Algorand is currently working on a privacy solution for smart contracts. Although no other details were disclosed, Woods — who previously worked as the director of Cardano architecture at Input Output Global (IOHK) — explained that IOHK is also looking to solve privacy around smart contracts with a product called Midnight..
Brody further noted that EY is building tools to enable both payments and private transfers on the public Ethereum network and is developing its own privacy-enabled products. For example, in July 2021, EY announced the release of Nightfall 3, a product that combines zero-knowledge proofs with Optimistic Rollups to improve transaction efficiency and privacy on Ethereum.
“Nightfall is an optimistic, zero-knowledge rollup for privacy payments and transfers,” Brody said. He added that Starlight is another EY product, acting as a compiler that turns solidity contracts into zero-knowledge and privacy-enabled circuits.. “Both are contributions to the public domain and accessible to all,” she said.
Even with privacy in smart contracts, anonymity is still a problem for large companies. Weijia Zhang, vice president of engineering at Wanchain and regional head of China at the Enterprise Ethereum Alliance, told Cointelegraph that smart contracts today do not have a mechanism to verify a user’s identity. In turn, bad actors can exploit flaws in a smart contract design, which can lead to stolen assets by unidentified actors. In fact, this is one of the main concerns as DeFi hacks continue to rise.
Smart contracts in the future
Concerns aside, it should be noted that solutions are being developed to advance smart contract capabilities. Thus, industry experts are confident that companies will use smart contracts in the future.
“There is no doubt that companies will eventually adopt smart contract solutions. There are many promising technological innovations in the public blockchain space that have smart contracts at their core.Zhang said.
That being said, it is important to mention that the platforms on which smart contracts run are also advancing. For example, Woods pointed out that Algorand focuses on scalability to support enterprise use cases. “It’s not that smart contracts have to be more expressive, but that we need to give more resources to smart contracts too. we also have to focus on scaling blockchains to ensure they are faster and capable of connecting to more smart contracts per second“.
Zhang further explained that a zero-knowledge Ethereum virtual machine can solve privacy and data challenges, while cross-chain bridging technology can solve interoperability problems. He added that sharding can solve scalability.
“Smart contract solutions will revolutionize complex systems that require the participation of multiple parties, leading to system-wide efficiencies. Not that companies are going to want to use these solutions. It’s that they’re going to have to,” he said. However, Brody did mention that it’s important to temper expectations, noting that:
“Businesses implement systems slowly, and typically only when necessary, due to a major upgrade or change in business operations. This means the adoption rates we see in the consumer world are not likely. What in the case of consumers takes a decade, in the enterprise space can happen slowly over 30 years.”
Clarification: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.