With the advent of the Ethereum blockchain everyone started to talk about “smart contracts” as an absolutely new approach to regulating relations among people. Today we will discuss what a smart contract is in simple words.
Smart contracts are a form of automated agreements that use electronic algorithms or conditions to facilitate the execution of various transactions. Their goal is to increase the transparency of transactions with a reduction in fees and eliminate potential conflicts in case one of the parties to a contract fails to fulfill its obligations.
A smart contract helps to avoid risks when making deals and prevent prolonged judicial process in case of default, to reduce costs by eliminating intermediaries and to ensure the bilateral trust.
Let’s consider an example. Let’s say you want to make an order in an online store that works on a prepayment system in order to reduce the risk of “non-buying” and not to incur unnecessary delivery costs. But you, on your side, are not sure about the reliability of the store and the quality of goods. In this case, you can sign an agreement via electronic signature, which will be recorded on the blockchain. When the terms of the contract are met (in our case, the goods of proper quality were delivered), the funds will be automatically transferred to the seller. Thus, a smart contract completely eliminates the element of mistrust.
To implement a smart contract we need a decentralized environment in which each and every participant has equal rights, and cryptocurrency as a means of payment. Ethereum was the first platform that widely applied smart contracts in practice — now they can be created on the basis of other blockchains and the technology is actively used in the business world.