A smart contract is a self executing program stored on a decentralised blockchain network — the blockchain technology is a database type that allows data to be stored in blocks that are chained together. Blockchain technology is often believed as the foundation of bitcoin, however, this technology has evolved beyond the virtual currency and it is used for many things.
Anyways, in this database, these smart contracts would have its conditions written directly in the code, and the code will control the implementation of the contract. If the predetermined conditions hadn’t been met, the contract would not run. The transactions from a smart contract are irreversible and they are also on record and trackable.
Smart contracts allow reliable transactions to be made without the need for central authority or a legal system, which would allow the buyers and sellers to keep anonymous while going through a transaction.
Smart contracts are programmed with simple “if…then…” statements that are written in code on the blockchain. There will be a network of computers that execute the actions of the conditional statements as soon as the conditions are met and verified. Some actions of these statements could include releasing funds to the clients, registering a vehicle, sending notifications, and so on. The blockchain will be then updated once there is a successful transaction. Once updated, the transactions will be permanent, and only people with permission are allowed to check the transaction results.
In a smart contract, there can be as many requirements and conditions as needed to be met in order to satisfy the seller. To establish these terms, the seller must regulate how they want their data and the transaction to be represented on the blockchain, such as: agreeing on the conditions and statements written in the code, discover all the possible exceptions and loopholes in the contract, as well as having to define a framework to resolve any possible disputes. Smart contracts are commonly programmed by a developer, though recently, there have been blockchain businesses that provide templates, web interfaces, or other tools to help out and simplify the process of structuring smart contracts.
There are many benefits to utilizing a smart contract, first of all, it allows transactions to be quick, smooth, accurate, and efficient. Since the contract is digital and automated, once the condition is met, the contract will be executed immediately. No paperwork or any manual work has to be done, which leaves out a lot of possible errors that a contract/transaction process might have. Second of all, because only the buyer and the seller are needed to be there in order to fill the contract, there will be no third party, which means the process will be extra transparent. Moreover, there are encrypted records of the transaction and the system updates itself, which will build transparency and trust in the process. Additionally, a smart contract is really secure, because blockchain transaction records are encrypted and it is nearly impossible to hack into it. Lastly, it helps save some money too. As there is no more need for intermediaries to handle the transaction process, there will be no need to pay their fees if a party uses a smart contract.
Ultimately, a smart contract is an advanced, automated system that allows transactions to be done safer, and easier.
Background:
The idea of a smart contract was first proposed by Nick Szabo, the American computer scientist that invented virtual currency, also first called “bit-gold” in 1998 — that is a whole decade before bitcoin was invented! Szabo defined smart contracts as “computerised transaction protocols that execute terms of a contract.” Essentially, he wanted electronic transactions methods, such as the point of sale (POS) to be introduced to the digital world as well.
Later, Szabo proposed in his paper for the execution of a contract for synthetic assets, like derivatives and bonds. As he wrote: “These new securities are formed by combining securities and derivatives in a wide variety of ways. Very complex term structures for payments can now be built into standardised contracts and traded with low transaction costs, due to computerised analysis of these complex term structures.” Primarily, Szabo was describing the transactions of derivatives. And now, the proposed idea is a well-known type of program, and derivatives trading are also mostly conducted through these computer networks and by a smart contract.