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What is a Smart Contract?

What is a Smart Contract?

A smart contract is a computer agreement designed to spread, verify, or execute a contract in an information-based way. A smart contract is a piece of code deployed on the blockchain and can be executed in accordance with the non-tampering rules set in the contract.

The purpose of smart contracts is to provide a better security method than traditional contracts and reduce other transaction costs related to the contract. Smart contracts can allow the blockchain to complete transactions that meet specific conditions on the basis of security and mutual trust.

Example: Vending Machines

Everyone should know the vending machine, this clumsy big guy is actually very powerful. You stuff money in and it will spit out merchandise. We can’t see the inner working mechanism, but we all know that if you don’t stuff money in, nothing will come out.

The buyer stuffs a certain amount of currency into the vending machine, chooses the goods to be purchased, and forms an enforceable contract between the two. The buyer stuffs the currency and selects the product, and the buyer provides the product and changes through the logic built into the vending machine.

A vending machine is essentially a smart contract; a smart contract is a way of reaching consensus among new participants. Its execution does not depend on any organization or individual, it is self-executing, and breach of contract is even impossible. Smart contracts will become the basic construction of the global economy. Anyone can use this method to participate in economic activities without the need for prior review and high prepayment costs. In traditional contract formulation, people must choose trusted persons and institutions, while smart contracts remove the need for trust in third parties from many economic transactions.

Smart Contract Working Logic

Developers will write code for smart contracts. Smart contracts can be used for transactions and/or any exchange behavior between two/multiple parties. This code contains some conditions that will trigger the automatic execution of the contract.

Once the coding is completed, the smart contracts are uploaded to the blockchain network, that is, they are sent to all devices connected to the network. In the case of another blockchain application-Bitcoin, it is like uploading network updates about Bitcoin transactions to the blockchain.

Once the data is uploaded to all devices, the user can reach an agreement with the result of executing the program code. Then update the database to record the execution of the contract and monitor the terms of the contract to check compliance.

In this way, a single party cannot manipulate the contract, because the control over the execution of the smart contract is not in the hands of any single party.

Features of smart contracts

Trustworthy: Numbers and programs are the most trustworthy, because we trust smart contract compilation languages, so we trust smart contracts.

Traceability: The blockchain records the input and output of each smart contract execution, configure the smart contract itself, and we can debug every smart contract that has been executed.

Irreversible: The executed smart contract is irreversible, guaranteeing the interests of both parties signing the contract.

Security: The technology is based on blockchain technology. The contract and data are on the chain, and security can be guaranteed.

Challenges

Once published, it cannot be revoked regardless of whether it is comprehensive or not

Judicial circles in various countries have not yet put smart contracts into regulation

Summary

To describe a smart contract in one sentence, it is a piece of code that executes on a trusted machine.

The biggest innovation of smart contracts is that tasks are enforced by the computing system without relying on third-party institutions, and they cannot be tampered with or revoked.

The purpose of smart contracts is to provide a safer method than traditional contracts and reduce other transaction costs associated with the contract. Although they are called “contracts”, it does not mean that they are equivalent to real-world contracts.

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