what is a smart contractMany Governments and financial institutions are turning to cryptocurrencies and blockchain as the financial future. One of the reasons for that is the blockchain is a decentralized system that exists between two or more parties without the need of brokers or middlemen. Smart contracts are the ways to achieve this. In crypto world, we often see the term “Smart Contracts” in many forums and exchanges. So, what is a Smart Contract?

What is a Smart Contract?

A Smart Contract AKA Crypto Contract is a self-executing contract where certain predefined terms and conditions are met. Smart Contracts are computer programs which are generally stored and secured using the blockchain technology. A great advantage with the smart contract is that it don’t require any middlemen or financial brokers for a transaction to take place. This is the reason why the smart contracts are known as “trustless peer-to-peer contracts.” Smart contracts not only defines the terms and conditions but also automatically enforces the obligations when the conditions are met.

Example of a Smart Contract

To explain the use and functionality of a smart contract, let us take an example of renting an apartment. So, in today’s world, if you want to rent an apartment, you need to go through the below process:

  1. First, you’ll need to approach a middleman like a newspaper, broker or craigslist to advertise your apartment.
  2. A documentation is to be made with a set of terms and conditions like the payment date, medium and other things.
  3. To see that the above conditions are met, you’ll again have to pay someone to go and collect rent on time and transfer to you.

Smart Contacts does the exact same thing but it automatically enforces the obligations without the need of any middlemen. Using smart contracts, the above process will reduce to:

  1. You create a smart contract on a blockchain technology and the tenant needs to pay using Bitcoin or other cryptocurrencies.
  2. The tenant will get a digital key as defined in the virtual contract once the agreed upon terms are met, like the lease date. If you don’t release the key after the date, they’ll get a refund. If you release the key before the date, the blockchain will hold it and release once the terms are met.
  3. Since this transaction is publicly available on the ledger, your payment is certain and doesn’t need any middlemen.
  4. The contract will expire after the agreed upon date.

We can use smart contracts in many fields like Automobile, Real Estate, Finance, Healthcare etc.

Smart Contracts in Ethereum Blockchain

Although smart contracts can be implemented on any blockchain, it’s often associated with Ethereum blockchain. One of the popular implementations is the token-sale in ICOs. The ICOs can simply create contracts that will accept Bitcoin or Ethereum in exchange for tokens. With smart contracts, the buyers will get an assurance that they’ll get tokens when they pay in cryptocurrency.

You can see an example of Ethereum smart contract below:

smart contract ethereum

Smart contracts eliminate the need for trust and replace it with a transparent blockchain based contract. This opens doors to the world of peer-to-peer transactions.