What are Smart Contracts?
Smart Contracts are much like traditional paper contracts in that they represent an agreement between two or more parties. Some people associate signing a contract with purchasing a home or leasing a automobile. Others may think of contracts when starting a business or selling a piece of property. All of these are also examples of tasks Smart Contracts can perform.
At its most elementary level, a smart contract can calculate mathematical functions such as addition or subtraction of funds — cryptocurrency, as well as perform transactions like completing a purchase or a sale, and, they can also store information on, for instance, your sales totals for the quarter. The types of functions each smart contract performs depends on the specifics of the contract when it was written.
How do smart contracts work?
As with any contract formation, it begins with predefined terms that are agreed upon by all parties. Once everyone agrees, a smart contract developer codes the necessary elements into the smart contract format on the blockchain. There is no action on the part of the smart contract unless a triggered event occurs. Once the event occurs, the smart contract is executed based on the terms agreed upon. Lastly, there is a payout instantly.
For example, let’s assume our smart contract pertains to auto insurance policy. The terms of the policy have already been agreed upon by all parties. In the unfortunate event that you have an accident (“triggered event”), the smart contract executes, and you receive payment (“payout”) to repair or purchase an auto.
This is but one example of a simple smart contract.
What makes smart contracts so “smart”?
Smart contracts are autonomous — meaning that they are not controlled by a third party, such as a bank. This process completely eliminates any middleman, such as a notary, that may have been needed with traditional contracts to verify authenticity.
The majority of traditional contracts are designed by third parties who charge unnecessary fees for the process of having a legal witness or to have your contract on record with a government or corporate institution to ensure safety. These practices are no longer necessary with smart contracts.
In closing, the takeaway is that smart contracts are an important technology that are, and will continue to change the way we write and agree to the terms and conditions of a contract. It gives us the guarantee of protection if and/or when the smart contract is executed. We no longer have to wait for an insurance adjuster to determine whether or not our auto has been in an accident, nor do we have to go without having transportation while we wait to see whether the insurance policy we have will pay for our expenses. We can focus on healing and handling our routines with the peace of mind that we’re protected by the smart contract.
