What is The Meaning of Smart Contracts [Explained]

Smart contracts were initially proposed in 1994 by Nick Szabo, an American computer scientist who developed a virtual currency called “Bit Gold” in 1998, some ten years before bitcoin. It was designed to make trade and business between identified and unidentified parties easier without the involvement of a third party.

Keep reading further to find out what smart contracts are and how they work!

What Is A Smart Contract?

A smart contract is a computer protocol that enables the digital verification, control, or execution of an agreement. It functions on the blockchain platform, which processes all transactions under a contract. This versatile system eliminates the need for a middleman or third parties for transaction execution.

Moreover, they are used to automate workflows, prompting the next action to be taken when conditions are satisfied, as well as the execution of agreements so that all parties can be immediately certain of the outcome.

Smart contracts specify guidelines and responsibilities for an agreement and automatically carry out those duties. This is similar to traditional contracts. While many smart contracts can be executed separately, they can also be used in combination.

How Do Smart Contracts Work?

Objects are the fundamental components of a smart contract. In this contract, the three main items are the signatories, or the parties involved, who employ digital signatures to approve or reject the contractual terms, the subject of the agreement or contract, and the precise terms.

The blockchain is a shared database operated by numerous computers, or “nodes,” that belong to numerous persons. As a result, it is not under the jurisdiction of any one person or entity.

Various conditions can be included in a smart contract to ensure that all parties will be satisfied with the task’s satisfactory completion. Participants must agree on the “if/when…then” rules that govern those transactions, consider any potential exceptions, and design a framework for resolving disputes in order to set the terms. They can also decide how transactions and their data are represented on the blockchain.

Benefits of Smart Contract

• Transparent

Since smart contracts are built on the blockchain, they ensure data integrity. It creates contracts and agreements without the need for prior interpersonal contact and prevents potential conditional breaches or errors.

• Fast

The time and financial costs are both decreased by the lack of intermediaries. Compared to contracts that are manually executed and in the presence of a third party, the time commitment is lower because the process is completed automatically.

•  Cost Saving

The associated costs are decreased since you won’t need to rely on a third party.  In this contract, you won’t have to confirm the contract’s terms and give the required confidence; hence intermediary fees are eliminated.

• Secure

All the transaction records are encrypted, making it difficult for hackers to attack. On a distributed ledger, each record is linked to the records before and after it. So for hackers to change a single record, they would need to change the entire chain.

• Cloud Backup

The blockchain makes many copies of each document, ensuring a safe cloud backup. With this technology, users can easily have easy access to the contract.

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