What are smart contracts in blockchain?


Have you ever bought a car? A house? If the answer is yes, you know the irritation that is specific to these complex types of transactions. Many industry leaders have felt the same pain and have explored how using smart contracts in blockchain can alleviate these situations. If you just learned about the concept or are looking for a detailed explanation, this guide is a great place to start.

What are smart contracts?

Smart contracts are lines of code stored in blockchain and executed automatically when pre-determined terms and conditions are met. Basically, they are programs executed as configured by the people who developed them. The benefits of smart contracts are most apparent in commercial collaborations, where they are generally used to enforce some kind of agreement so that all participants can be sure of the outcome without the involvement of an intermediary.

Bring transparency, simplicity and efficiency to any financial transaction

What is blockchain?

Blockchain is a shared and distributed ledger, in which transactions are recorded and linked digitally to provide the entire history or provenance of an asset. A transaction is added to the blockchain only after it has been validated using a consensus protocol, which ensures that it is the only version of the truth. Each record is also encrypted to provide an extra layer of security. The blockchain is said to be “immutable” because the records cannot be changed and transparent because all participants in a trade have access to the same version of the truth.

What do smart contracts do?

The easiest way to explain what a smart contract does is by example. If you have already bought a car at a dealership, you know that there are several steps and that it can be a frustrating process. If you cannot pay for the car right away, you will need to obtain financing. This will require a credit check and you will need to complete several forms with your personal information to verify your identity. Along the way, you will have to interact with several different people, including the seller, the financial broker and the lender. To compensate for your work, several commissions and fees are added to the base price of the car.

What smart blockchain contracts do is to simplify this complex process that involves multiple intermediaries due to the lack of trust between the participants in the transaction. With their identity stored on a blockchain, creditors can quickly make a credit decision. Then, a smart contract would be created between your bank, the dealer and the lender so that, once the funds are released, the lender keeps the title of the car and the payment is initiated based on the agreed terms. The transfer of ownership would be automatic, as the transaction is recorded on a blockchain and shared between the participants and can be verified at any time.

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How do smart contracts work?

Smart contracts work by following simple instructions like “if / when … then …”, which are written into a blockchain’s code. A computer network will carry out the actions (freeing up funds for the appropriate parties; registering a vehicle; sending notifications; issuing a ticket) when the predetermined conditions are met and verified. The blockchain is then updated when the transaction is completed.

Let’s look at how this happens in an example of a supply chain. Buyer B wants to buy something from Seller A and puts money into a guarantee account. Seller A will use Sender C to deliver the product to Buyer B. When Buyer B receives the item, the money under warranty will be released to Seller A and Sender C. If Buyer B does not receive the shipment by Date Z , the money in guarantee will be returned. When this transaction is executed, Manufacturer G is notified to create another item sold to increase the supply. This is done automatically.

Within a smart contract, there may be as many stipulations as necessary to convince participants that the task will be completed satisfactorily. To establish the terms, participants in a blockchain platform must determine how transactions and their data are represented, agree with the rules that govern those transactions, explore all possible exceptions and define a framework for resolving disputes. It is generally an iterative process that involves developers and business stakeholders.

What are the benefits of smart contracts?

The benefits of smart contracts go hand in hand with blockchain.
Speed and precision: smart contracts are digital and automated; therefore, you will not need to spend time processing paperwork or reconciling and correcting


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