What are Smart Contracts in Blockchain, & How Do They Work?

Updated on: December 26, 2020

Everything is smart these days, from our phones and cars, even to our homes. And thanks to the Blockchain, we have smart contracts. You might’ve heard the term smart contracts, but if you’re unsure what it means or how they work, this article is an excellent starting point.

A smart contract involves no other participant except those directly transacting. They’re cheaper, faster, and offer much more security than traditional methods. This is the reason governments and financial institutions are taking it more seriously

What are smart contracts in Blockchain?

Smart contracts are codes that store and enforce contractual clauses using Blockchain and will self-execute when explicit, predetermined terms and conditions are met. The contractual provisions are typically agreements between multiple parties in business collaborations.

Hence, smart contracts eliminate the engagement of an intermediary party in such transactions. There is no need for a third-party because the smart contract transactions will never happen if the initial conditions aren’t meet.

How do smart contracts work?

Smart contracts work using a network of computers executing actions based on “if” statements in a piece of blockchain code. I’ll use a physical, real-world scenario to explain better how a smart contract work. Let’s say Elon wants to sell his house to Sam for 600 BTC with a smart contract.

Relating this scenario to smart contracts in Blockchain, we can assume that Sam sends the funds to an escrow who will only release it when the agreement is reached. The smart contract’s agreement would say:

“When Sam pays 600 BTC to Elon, Sam becomes the owner of the house.”

If the above conditions are not met for some reason – Elon doesn’t get the bitcoin or Sam doesn’t send it – if any of these don’t get it fulfilled, the deal is off.

Once signed, you can’t change this smart contract agreement. No matter how huge the funds are, both parties need no bank, lawyer, government, or agent to make the deal possible and safe. The possibilities with smart contracts are limitless.

Blockchain Smart Contract how it work

Importance of smart contacts

The applications of smart contracts abound in every industry in document management, real estate, cross-border financial transactions, ownership transfer, logistics services, decentralized storage, and even renewable energy. At the center of it all is the Blockchain, which processes the transactions.

The financial industry is the most popular industry that uses smart contracts for customers’ transference of digital tokens and cryptocurrency between parties. Smart contracts also help prevent money laundering.

  • Trust

Smart contracts trigger transactions when conditions are met. The fact that neither participant in a smart contract can modify its information increases trust because there’s no risk of the other party not honoring the contract in any circumstance.

  • Data Security

Smart contracts work on the blockchain decentralized ledger. Firstly, blockchain transactions are stored in encrypted records that are virtually impossible to compromise. Also, every node is interconnected and can’t be altered individually.

  • Reduced costs

I mentioned earlier how smart contracts need no escrow, regulation, or intermediaries to make deals possible. Because of this, participants save the huge fees they’d have budgeted for the services of the third-party in a business deal.

  • Speed and precision

Thanks to smart contracts and the Blockchain, you can carry out transactions of all kinds instantly. Smart contracts need no paperwork, file transfers, etc. The data and execution are also precisely because it eliminates human error.

These are some key points related to smart contracts in Blockchain technology. Implementation of Blockchain smart contracts is a bit complex w.r.t requirements and coding but it will help to create a transparent ecosystem without any middle man. This is the biggest advantage of using Blockchain in future business application development & consumer ecosystem.

Saurabh Mukhekar
Saurabh Mukhekar is a Professional Tech Blogger. World Traveler. He is also thinker, maker, life long learner, hybrid developer, edupreneur, mover & shaker. He's captain planet of BlogSaays and seemingly best described in rhyme. Follow Him On Facebook

Leave a Reply

Your email address will not be published. Required fields are marked *

Share via
Copy link