Smart contracts are small programs stored on a blockchain that run when predetermined conditions are met. Smart contracts are typically used to automate the execution of an agreement in order that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. Smart contracts can also automate a workflow and trigger the next action when conditions are met.
Smart contracts work by following “if/else/when…then…” statements which are written into code on a blockchain. A network of computers executes the actions when predetermined conditions have been met and verified. These actions could for example include the release of funds to appropriate parties, registering a vehicle, sending notifications, or issuing a ticket. The blockchain is then updated when the transaction is completed. The special thing about this is that the transaction cannot be changed, and only parties who have been granted permission can see the results.
Using a smart contract, there can be as many stipulations as needed to satisfy the participants that the task will be completed satisfactorily. To establish the terms of the smart contract, participants must determine how transactions and their data are represented on the blockchain, agree on the “if/else/when…then…” rules that govern those transactions, explore all possible exceptions, and define a framework for resolving disputes.
The smart contract can be programmed by any developer – although increasingly, organizations that use blockchain for business provide templates, web interfaces, and other online tools to simplify the creating of smart contracts.
Automated: Smart contracts are fast, efficient, and accurate. Once the programmed condition is met, the contract is executed immediately. Because smart contracts are digital and automated, there is no paperwork to process and no time spent reconciling errors that often result from manually filling in documents.
Transparent: Smart contract do not rely on any third party. Since encrypted records of transactions are shared across participants, there is no need to worry whether information ha been altered for personal benefit.
Secure: Transaction records on the blockchain are encrypted, which makes them very hard to hack. Each block of information is connected to the previous and subsequent records on a distributed ledger, making it impossible for hackers to alter the entire chain to change a single record.
Cost saving: The need of having intermediaries is removed, thus reducing costs in processing transactions.