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  • Writer's pictureshreya chaudhary

What Are Smart Contracts?

Imagine you got a great job opportunity in America, they promise you a good sum of money as salary, they are also providing you with a visa, health insurance, etc as well as accommodation. You are very excited about this opportunity but how sure are you that they will give you what they promised?

You cannot blindly trust them, you need some legal proof that you will receive the promised benefits as well as salary, this is where a contract comes into play.

In simple words: A contract is a legally binding agreement that describes how two parties are related and what one party is supposed to give or take in return for the work the second party is doing for them. Here, your company is the first party and you are the second party. It is signed by both parties and should abide by it.

Since cryptocurrencies are purely digital and are used for transactions, purchases, and many other things, there needs to be a certain agreement between buyer and seller about the exchange and other rules regarding the transaction. This is what a smart contract is all about.

A smart contract is a digital contract that executes itself when the specified conditions are met. This contract is a simple program made up of lines of codes that explains the agreement between the buyer and seller party. This agreement exists across the decentralized blockchain network. The code controls the execution of transactions that are transparent, traceable, and irreversible. The code develops an automatic flow, that checks if the conditions are met successfully and will then trigger the next set of instructions.

In 1994 Nick Sabo, first proposed the idea of smart contracts, he defined it as a protocol for digital transactions that will execute the terms of a contract. He wanted to extend the functionalities of the traditional transactions (usually transactions that include the creation of printed or handwritten receipts after the purchase) so that they could be fully digital.

How do these smart contracts work?

A smart contract contains conditional statements, these work in such a way that, if the given condition is satisfied then a set of instruction will be executed, and if the given condition is not satisfied then another set of instructions are executed. There will be a series of conditions and conditional statements based on them. Nodes on the blockchain execute these conditions and then perform the specified actions, like releasing funds to another party, or receive funds from some other party, or create a token, etc. These transactions are then updated on the blockchain, and cannot be changed. Here the blockchain acts as a public ledger, and stores all the transactions for transparency.

If I want to create a smart contract on the blockchain for selling my house, my smart contract can contain as many terms and conditions as I want. To establish these terms and conditions I would have to determine how the data and transactions are represented on the blockchain, create conditional statements that would satisfy these terms and conditions, explore if there are any exceptions, and also provide some solutions to resolve disputes if they occur.

Since there is no central authority and encrypted records are shared across the participants, it is where difficult to tamper with these smart contracts and change the terms of the agreement. Once the condition is met the transaction takes place, there is no paperwork involved and hence no time is wasted correcting errors, this makes smart contracts faster and more efficient. It also avoids the time delay and fees by removing the middlemen required to handle transactions.

I hope you guys have understood how smart these contracts are!

These contracts are just business rules translated into software or stored programs. The main responsibility of the contract is the same, that is to provide rules for an agreement. But these contracts can expand their boundaries and include multiple parties, corporations, etc that the traditional contracts cannot provide.

As the domain of cryptocurrencies is developing day by day, these smart contracts are very important for their transparent and trusted functioning.

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