Sep 15, 2023
It gets automatically executed digitally on the blockchain when meeting predetermined terms and conditions.
Smart contracts are programs, which are stored on a blockchain and get into execution only if the pre-mentioned terms and conditions got matched, without any involvement of any mediator. It runs on statements used as code in the blockchain viz. if, when, then, etc. The execution takes place in a network of computers after meeting and verification of the pre-determined conditions. These actions include releasing money from one party to another, registering a property, notifications, and issuing tickets.
After the completion of the transaction, an update takes place in the blockchain.
The most popular platform for smart contracts is Ethereum, which is also a widely used cryptocurrency platform. Since Ethereum, a variety of cryptocurrencies have supported scripting languages that enable smart contracts to be built in a more advanced way amongst non-trusted parties.
Smart contracts enable trusted transactions and agreements between dispersed, anonymous parties, without requiring central authorities, a legal system, or an external enforcement mechanism.
No one needs to verify that contract conditions are met, or to enforce contracts on their own, meaning that smart contracts can be used without needing unnecessary fees. With a smart contract, some default terms and conditions are set up ahead of time within the contract.
A smart contract defines rules among various organizations in an executable piece of code. Before businesses can conduct transactions with one another, they need to define a shared set of contracts that covers terms, data, rules, definitions of concepts, and processes. Based on blockchain technology, smart contracts are poised and composed to change how to conduct business, eliminating the need for interpretations about the execution of contracts.
Like blockchain technology, which powers most cryptocurrencies, Smart contracts are born out of an earlier, not-quite-finished technology. The actual tasks that smart contracts do are quite rudimentary, like moving a sum of cryptocurrency automatically from one party's wallet to the other once specific criteria are met. Once deployed, the code of a smart contract is stored - in its compiled form - on the Ethereum blockchain and assigned an address.
This machine state, to which all nodes in Ethereum agree to maintain a copy, stores the smart contract's code, as well as rules that those contracts are expected to follow. Unlike most blockchain networks, which are described as distributed ledgers, Ethereum is considered a distributed state machine, holding what is known as the Ethereum Virtual Machine (EVM). The Ethereum community developed the Solidity language to write smart contract applications, which are designed to be executed in an Ethereum Virtual Machine (EVM) runtime environment.
It is executed in a distributed fashion by miners on the underlying blockchain network, if and when underlying conditions are met. The code controls execution and transactions are traceable and irreversible. The last one refers to traditional, legally binding agreements in natural language, with specific terms expressed and implemented in machine-readable code.
The agreement facilitates the exchange of money, stock, property, or any kind of assets. Simple events can be conditions, such as permission to pay, receipt of goods, or a threshold reading on the electric utility meters. This is because, for many base functions, you could create and use text templates that specify which parameters you would like to input and how these parameters would execute.
Another potential use case is the integration of smart contracts in vending machines, which can issue goods in response to crypto payments. To a certain degree, contract parties' lack of understanding of the smart contract's code would not be an obstacle to entering into agreements with supporting code.