Abbreviation(s) and Synonym(s): none
A collection of code and data (sometimes referred to as functions and state) that is deployed using cryptographically signed transactions on the blockchain network. The smart contract is executed by nodes within the blockchain network; all nodes must derive the same results for the execution, and the results of execution are recorded on the blockchain.
The easiest way to explain what a smart contract does is through an example. If you’ve ever bought a car at a dealership, you know there are several steps and it can be a frustrating process. If can’t pay for the car outright, you’ll have to obtain financing. This will require a credit check and you’ll have to fill out several forms with your personal information to verify your identity. Along the way, you’ll have to interact with several different people, including the salesperson, finance broker and lender. To compensate their work, various commissions and fees are added to the base price of the car.
The smart contract is an “intelligent contract” generated by an automated computer program. This computer protocol automates an action when prerequisite conditions are met.
The objective of the smart contract is to make it possible to carry out all types of transactions, mostly financial (not exclusively).
Would you enter into a contract with someone whom you’ve never met, and therefore don’t know and don’t trust? Would you become an investor in a small company in a foreign country? Would you agree to lend money to a stranger, like a farmer in Guatemala, a teacher in China, or to a cashier in the UK? Or would you set up a legally binding contract for a 1 EUR-purchase over the Internet, like buying a song from an artist? The answer in all of the above-mentioned cases is probably no, as the cost of setting up the necessary legal contract to secure your transaction is too high. We either don’t enter into such a contract at all or use trusted intermediaries to settle such contracts, paying them substantial settlement fees for their services.
Smart contracts are potentially one of the most useful tools associated with blockchain, and they can enable the transfer of everything from bitcoin and fiat currency to goods transported around the world. Here’s what they do and why they’re likely to gain traction.