Simply put, smart contracts are computer programs or protocols for automated transactions that are stored on a blockchain.
What is a Smart Contract?
A lot has been said and discussed about Smart Contracts and how they will transform the world. But, not many actual potential users of Smart Contracts know what Smart Contracts are and how they will be able to benefit from Smart Contracts.
Simply put, smart contracts are computer programs or protocols for automated transactions that are stored on a blockchain. These protocols run in response to meeting certain conditions that are programmed into the contracts. Smart contracts automate the execution of agreements so that all participants can access the outcome as it happens without the involvement of an intermediary or time delay.
• Smart contracts are self-managing contracts that execute themselves as per the contents of the buyer-seller agreement that are inscribed directly into the code.
• Smart Contracts make the transactions traceable, transparent, and irreversible.
How Do Smart Contracts Work?
A smart contract is a piece of code that has business logic built in and resides and operates on a dedicated (virtual) machine embedded in a distributed ledger, called a blockchain. At a high-level, the following are the steps for generating smart contracts:
• Define the business process and the desired actions (Payment, Incentive, Penalty etc) to be taken by smart contracts as per the defined events.
• The technology team uses a smart contract writing platform to create the logic.
• The contract is then deployed on an existing public blockchain (for example ETH, Polygon etc.) or other your own distributed ledger infrastructure (private blockchain) once it has been authorized.
• ‘Oracles’ are then configured into the contract to ‘listen’ to the event updates as per data received from the ‘streams’.
• As soon as the event update happens and the necessary combinations achieved, the set of actions configured to precede the even are triggered.
What are the benefits of Smart Contracts?
o Smart Contracts eliminate the chance of users tempering with data as the copies are stored in multiple ledgers.
o Encrypted transaction logs are exchanged among participants to keep everyone on same page.
• Accuracy & Efficiency:
o Smart contracts are immediately executed when the defined conditions are met.
o As smart contracts are digital and automated, there is no requirement for a manual approval or paperwork to deal with.
o Minimal or no involvement of human effort for creating or executing contracts
o As blockchain transaction records are encrypted, they are extremely difficult to hack.
o Every entry on a distributed ledger is linked to the entries before and after it, In case someone tries to manipulate the record, the entire chain to change a single record.
o Smart contracts eliminate the need for intermediaries to conduct transactions, as well as the time delays and fees that come with them.