What is a smart contract?
Smart contract is a program stored on a blockchain that runs when the pre-set conditions are met. They are usually used to automate the execution of an agreement, so that all participants can be immediately sure of the outcome, without the involvement of the intermediary or the loss of time. They can also automate a workflow, triggering the next action when the conditions are met.
How smart contracts work
Smart contracts work by following simple „if / when… then” statements that are written in code on a blockchain. A network of computers performs actions when the preset conditions have been met and verified. These actions could include issuing funds to the competent parties, registering a vehicle, sending notifications or issuing a ticket. The blockchain is then updated upon completion of the transaction. This means that the transaction cannot be changed and only the parties who have been granted permission can see the results.
Under a smart contract, there may be as many provisions as necessary to ensure that the participants will perform the task satisfactorily. In order to set the terms, participants must determine how their transactions and data are represented on the blockchain, agree on the „if / when ... then ...” rules governing those transactions, explore all possible exceptions, and define a framework for resolving disputes.
Key benefits of smart contracts:
The transparent and unalterable nature of blockchain technology gives it a number of benefits for organizations:
• Speed, efficiency and accuracy: once a condition is met, the contract is executed immediately. Because smart contracts are digital and automated, there are no documents to process and no time to reconcile the errors that often result from manually completing documents.
• Trust and transparency: because there is no third party involved and encrypted transaction records are shared between participants, there is no need to question whether the information has been changed for personal gain.
• Security: blockchain transaction records are encrypted, making them very difficult to hack. Moreover, because each record is connected to previous and subsequent records on a distributed registry, hackers should modify the entire chain to change a single record.
• Saving: smart contracts eliminate the need for intermediaries to manage transactions and, by extension, the delays and fees associated with them