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A smart contract is a contractual agreement on the top of the blockchain written that is implemented using the software. Unlike a traditional contract where parties may seek remedial action through the legal system, a smart contract is self-enforced (possibly also self- executed), depending on whether specific conditions, that are monitored through software, are met.

Smart contracts are written in computer coding languages and are embedded on the top of the blockchain. They contain all the relevant information- rules, criterion, terms of expiry, and all the conditions which need to be met for fulfilment. The smart contract behaves in a predefined manner- if one condition is fulfilled, it will complete the designated action.

Imagine a smart contract with the explanation of Don Tapscott:

“It’s a contract that self-executes, and has a payment system built into it, sort of like a contract that has built-in lawyers, governments and a bank account”

A super simple example of a smart contract:

John and Bob decide to make a bet. John says he will pay 1 Bitcoin to Bob if it rains in the Sahara. These conditions are recorded on the blockchain: the rain needs to be more than 5 mm, and they set the parameters of the Sahara with geographical coordinates. They include a meteorological station as an oracle, which records the precipitation on the blockchain. At the moment, when in the defined geographical area the rain reaches 5 mm, 1 Bitcoin will be transferred from John to Bob.

Smart contracts elevate the decentralized ledger: on the top of registering transactions, the smart contract also executes them, while providing transparency, efficiency, and trust. They provide equality between all the parties, without the risk of a different interpretation of conditions.

The outcomes of the smart contract are enforced, obligations cannot be avoided. With the inclusion of smart oracles, which define whether certain conditions are met, transactions with smart contracts can be made easier and more cost-effective than today.

Smart contracts are a progressing technology within blockchains, and they are the key part of creating decentralized applications on a blockchain platform. Besides Ethereum, which is the biggest platform for smart contracts and dApps, we can see many other platforms emerging who aims to make smart contract creation intuitive. Smart contracts bring us an amazing automated, smart future, and they are an essential part of blockchain tech.

By Barbora Juhaszova