What is a Smart Contract and How Does it Work?

Curious about smart contracts on the blockchain? Want to understand how they function and what purposes they serve? Dive in to learn all about them.

What is a Smart contract?

A smart contract is like a digital agreement that's programmed to carry out tasks automatically once certain conditions are fulfilled. It's built on blockchain technology, acting as a self-executing code. 

So, when predetermined conditions are satisfied between involved parties, the smart contract kicks in and performs its designated actions automatically, removing the need for intermediaries or third parties.

How do Smart Contracts Work?

Smart contracts are essentially digital agreements stored on the blockchain. They work by using simple conditions to trigger specific actions, similar to "if-then" statements. For instance, if certain conditions are met (the "if" part), then the contract automatically executes a predetermined action (the "then" part). A simple analogy is a vending machine: if you insert money and select a product, then you receive the chosen item.

However, smart contracts can handle a wide range of agreements beyond vending machines. While they're currently prominent in the DeFi (Decentralized Finance) sector for financial products, their potential extends to various industries such as retail, real estate, healthcare, and more.

Benefits of Smart Contract

Smart contracts offer numerous advantages:

1. Speed & efficiency: By automating processes and cutting out intermediaries, transactions occur swiftly.
2. Cost-effectiveness: Eliminating third parties can reduce costs, potentially saving investors money on fees. However, in congested networks, users may still encounter high transaction fees.
3. Transparency: Transactions executed through smart contracts are recorded on the public blockchain ledger, making details accessible to anyone. Additionally, most smart contract code is open-source, enhancing transparency.
4. Security: With predetermined conditions, smart contracts ensure a high level of security for transactions. If the code is robust, transactions proceed only when conditions are met, mitigating risks.

Smart Contract vs Written Contract

Smart Contract:

• Fully automated: Operates without human intervention, executing predefined actions automatically.
• Immutable: Once deployed on the blockchain, the code and terms of the contract cannot be altered, ensuring trust and reliability.
• No third-party intermediaries: Transactions occur directly between involved parties, eliminating the need for intermediaries like brokers or lawyers.
• Recorded on a public ledger: Transaction details are stored on a transparent and immutable public ledger, accessible to anyone with internet access, ensuring transparency and accountability.

Written Contract:

• Processed by humans: Creation, negotiation, and execution of terms typically involve human intervention, requiring manual handling and oversight.
• Mutable: Terms and conditions can be amended or revised through mutual agreement between the parties involved, allowing for flexibility but potentially raising issues of trust and accountability.
• Involves intermediary parties: Often requires the involvement of intermediary parties such as lawyers, brokers, or notaries to facilitate and ensure the legality and enforceability of the contract.
• Stored as private physical or digital documents: Contract documents are typically stored privately by the involved parties, either as physical copies or digital files, limiting access to authorized personnel and parties involved.

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