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What Is a Smart Contract?

A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible.

Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism.

In simple words, Smart contracts are digital contracts stored on a blockchain that is automatically executed when predetermined terms and conditions are met.

How Smart Contracts Work?

Smart contracts work by following simple “if/when…then…” statements that are written into code on a blockchain. A network of computers executes the actions when predetermined conditions have been met and verified. These actions could include releasing funds to the appropriate parties, registering a vehicle, sending notifications, or issuing a ticket. The blockchain is then updated when the transaction is completed. That means the transaction cannot be changed, and only parties who have been granted permission can see the results.

Within a smart contract, there can be as many stipulations as needed to satisfy the participants that the task will be completed satisfactorily. To establish the terms, participants must determine how transactions and their data are represented on the blockchain, agree on the “if/when...then…” rules that govern those transactions, explore all possible exceptions, and define a framework for resolving disputes.

Then the smart contract can be programmed by a developer – although increasingly, organizations that use blockchain for business provide templates, web interfaces, and other online tools to simplify structuring smart contracts.



Smart Contract Advantages

There are several potential business advantages from using smart contracts.

  • Cost efficiency- Smart contracts promise to automate business processes that span organizational boundaries. This can eliminate many operational expenses and save resources, including the personnel needed to monitor the progress of a complex process that executes in response to conditions that span companies.
  • Processing speed- Smart contracts can improve the processing speed of business processes that run across multiple enterprises.
  • Autonomy- Smart contracts are performed automatically by the network and reduce the need for a third party to manage transactions between businesses.
  • Reliability- Smart contracts can also take advantage of blockchain ledgers and other distributed ledger technologies to maintain a verifiable record of all activity related to the execution of complex processes and that cannot be changed after the fact. It also supports automated transactions that remove the potential for human error and ensure accuracy in executing the contracts.

Summary

  • Smart contracts refer to computer protocols that digitally facilitate the execution of an agreement, which are kept in public databases.
  • They are a faster, cheaper, and more secure way of executing and managing agreements.
  • The technical difficulty of making changes and the inability to handle complex transactions are some issues with smart contracts that need to be rectified to gain mass adoption. 

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