Decentralized finance (DeFi) markets may have cooled down over the past year, but the technology powering these applications continues to advance. In particular, smart contract platforms that enable transactions to take place across DeFi applications are maturing to meet enterprise requirements.
While it’s notable that enterprises have previously shown interest in DeFi use cases, smart contract limitations have hampered adoption. A report published by Grayscale Research in March puts this in perspective, noting that “Despite handling millions of transactions per day, smart contract platforms in their current state would be incapable of handling even 10% of the worlds’ internet traffic.”
This notion is particularly troublesome considering the market opportunity behind DeFi. For instance, Grayscale Research’s report mentions that DeFi and Metaverse applications combined are likely to have a market capitalization much larger than the current digital asset market.
How smart contracts are advancing
Given this potential, it’s become clear that smart contracts must advance in order to accommodate growth. John Woods, chief technology officer of the Algorand Foundation — the supporting organization of the eponymous blockchain ecosystem — told Cointelegraph that today’s 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.
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Woods shared that smart contracts uploaded to the Algorand blockchain are applied primarily to traditional DeFi use cases that enable things like automatic trading of on-chain digital assets. Yet, when it comes to enterprise use cases, Woods mentioned that he believes it’s best to put as little information on-chain as possible. He said:“I’ve previously worked with large enterprises that would want to conduct DeFi use cases like post-trade settlement on a blockchain network. When I was building those enterprise applications, I would only put the most important pieces of information on-chain. This would allow smart contracts to perform efficiently without having to do heavy computation on-chain.”
According to Woods, this methodology allows enterprises to benefit from smart contacts, yet only when simple computations are involved. While this may serve as a solution to current limitations, advancements are being made to ensure that all enterprise data can be supported by smart contracts.
For example, Scott Dykstra, chief technology officer 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 in a single cluster.
“We’re working to enable developers to run queries against data we’ve indexed from all major blockchains and data loaded from any off-chain source,” he explained. After queries are run, Dykstra explained that Space and Time uses patented novel cryptography, known as “Proof of SQL,” which can prove each query result is accurate and that the underlying data hasn’t been tampered with.
This is an important point, as Dykstra pointed out that enterprise data queries are typically run in off-chain data warehouses. But, because these data warehouses are centralized, query results often can’t be trusted by a smart contract and, therefore can result in limitations.
Given that Space and Time can cryptographically prove that each data query result is accurate, Dykstra explained that this allows for complex computations to be connected directly to smart contracts without limitations.
“Space and Time’s ability to connect analytic query results directly to smart contracts (with cryptographic guarantees), will serve as a trustless intermediary between enterprise data and the limited storage of the blockchain,” he said. In turn, this process will automate more complex business logic for enterprise use.
Although this solution allows for complex data to be processed by smart contracts, privacy concerns remain. Paul Brody, global blockchain lead at EY, told Cointelegraph that while the value proposition of smart contracts for enterprises is enormous, so are the obstacles. He said:“The biggest is privacy — public blockchains don’t natively support privacy. Since companies consider their buying arrangements to be sensitive information, no firm will deploy these solutions until they are confident in the privacy approach.”
Woods is also aware that enterprises are hesitant to use smart contracts due to privacy concerns. “Everything currently done across a public blockchain network is transparent, but enterprise use cases require some level of privacy. What’s coming next is privacy on smart contracts,” he said.
As such, Woods shared that Algorand is currently working on a smart contract privacy solution. While no other details were revealed, Woods — who previously worked as the director of Cardano architecture at Input Output Global (IOHK) — explained that IOHK is also looking into solving privacy around smart contracts with a product called Midnight.
Brody further noted that EY is building tools to enable both private payments and 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 a zero knowledge-optimistic roll-up for payments and transfers under privacy,” Brody said. He added that Starlight is another product from EY, which acts as a compiler that converts solidity contracts into zero knowledge, privacy-enabled circuits. “Both are contributions into the public domain and accessible to all,” he said.
Even with privacy across smart contracts, anonymity remains an issue for large companies. Weijia Zhang, vice president of engineering at Wanchain and the 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’s design, which can result in stolen assets by unidentified actors. Indeed, this is a major concern as DeFi hacks continue to increase.
Smart contracts in the future
Concerns aside, it’s notable that solutions are being developed to advance smart contract capabilities. Industry experts are, therefore, confident that enterprises will use smart contracts in the future.
“There is no doubt that enterprises will eventually adopt smart contract solutions. There are multiple promising technological innovations occurring in the public blockchain space that have smart contracts at their core,” said Zhang.
That said, it’s important to mention that platforms on which smart contracts execute are also advancing. For example, Woods noted that Algorand focuses on scalability to support enterprise use cases. “It’s not that smart contracts need to get more expressive, but we need to give more resources to smart contracts as well. We also need to focus on scaling blockchains to make sure they are faster and able to connect 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 bridge technology can solve interoperability issues. He added that sharding can solve scalability.
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“Smart contract solutions will revolutionize complex systems that require the participation of multiple parties, resulting in system-wide efficiencies. It’s not that enterprises will want to use these solutions. It’s that they’ll have to,” he said. Yet, Brody mentioned that it’s important to temper expectations, noting:“Companies implement systems slowly and usually only when necessary, because of a major upgrade or a change in business operations. This means that adoption rates that we see in the consumer world are not likely. What takes a decade for consumers might happen slowly over 30 years in the enterprise space.”