Smart Contract: how does it work?

by Cristina Cannata
Sep. 2, 2019
3 minutes

Smart Contract” is a new software terminology developed and promoted by public blockchains. It is one of the most successful and utilized application of blockchain technology.

Even if a smart conctract can be built on multiple blockchain platforms, smart contracts are one of the main products of Ethereum blockchain, the second-largest blockchain currently in place. Ethereum features a “Turing-completeness” language (Solidity) that serves the creation and deployment of customized smart contracts. If it ensures greated flexibility, on the other hand there is not a fix and certain pre-testable output, resulting in a more risky outcome.

Ethereum is also a blockchain platform where other decentralized applications can be built on. Ethereum fuel is called “Ether”, the cryptocurrency used to pay for transactions.
In order to run any application on Ethereum blockchain, ether is needed.

What is a smart contract?

Framework

Nick Szabo was the first to introduce smart contract concept in 1994. He basically realized the idea that a contract can be recorded in the form of a computer code. A contract of this kind self-execute automatically when certain terms conditions are met on a trusted network. This means that trusted third-party and middle-men are no longer needed to make a transaction (or a contract).
Szabo wrote a book named “Smart Contracts: building blocks for digital free market”. The concept of smart contract spread when blockchain technology was introducted thanks to Bitcoin in 2009, but gained much more interest in 2015 thanks to Ethereum rise.

Definition

A smart contract is defined as a set of computed code between two or more parties that run on blockchain and constitutes of a set of rules which are agreed upon the involved parties. Once these rules are met, the smart contract executes itself to produce the output.

This trait brings out an important point related to smart contracts, and more widely to blockchain: no third-party is needed to validate the transaction (no banks, no brokers etc.). Thanks to blockchain technology smart contracts can streamline and disintermediate the process, thus there is not a central party that has the control on them.

Smart contracts permit you to exchange anything of value without needing to refer to middlemen.

Smart contract usually involve digital assets and multiple parties that can automatically govern and manage their assets according the rules of the contract. This idea brings lots of benefits such as saving costs and the chance to real time track performances.

Three key points

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Smart contracs are utilized in many fields, such as finance, insurance, legal processes, health services, business management, and so on.
One of the most interesting application is ICO.

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Smart Contract’s benefits

Applying smart contracts in our daily life to replace traditional contracts means benefit from all the advantages related to them.

  1. Accuracy and Precision: Smart contracts are filled with all terms and conditions defined and checked by the parties involved. They are coded in a detailed form. This eliminates the chance of disputes or errors.
  2. Trust: Smart contracts are transparent and secure. The transactions related are stored in the blockchain so all the data are encrypted on a shared ledger. There is no chance for manipulation or manual errors.
  3. Autonomy: The agreement is made by the parties involved so there is no need to rely on middle-man or intermediaries to confirm. The execution is managed automatically when the conditions are met.
  4. Savings: Smart contracts can result in a lot of savings. Since there are no middle-men involved, it permits to save time and money. Smart contract are also results in saving paper.

Traditional contracts involve high costs, third-parties, much paperwork and chance of errors. Smart contracts make these processes more reliable and cost-effective: they permit to automate and streamline transactions and processes.

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