Ajulu’s Thoughts
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Ajulu’s Thoughts

What are Smart Contracts? How Do They Work? Smart Contracts Explained

A smart contract is a computer program or a transaction protocol that is intended to automatically execute, control, or document legally relevant events and actions according to the terms of a contract or an agreement. The objectives of smart contracts are the reduction of need in trusted intermediates, arbitrations, and enforcement costs, fraud losses, as well as the reduction of malicious and accidental exceptions. 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. Smart contracts are made possible by blockchains , a network of computers that work together to enforce rules on the network without requiring the help of an intermediary. 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. Benefits of smart contracts Speed, efficiency, and accuracy Once a condition is met, the contract is executed immediately. Because smart contracts are digital and automated, there’s no paperwork to process and no time spent reconciling errors that often result from manually filling in documents. Trust and transparency Because there’s no third party involved, and because encrypted records of transactions are shared across participants, there’s no need to question whether information has been altered for personal benefit. Security Blockchain transaction records are encrypted, which makes them very hard to hack. Moreover, because each record is connected to the previous and subsequent records on a distributed ledger, hackers would have to alter the entire chain to change a single record. Savings Smart contracts remove the need for intermediaries to handle transactions and, by extension, their associated time delays and fees.

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