Like many ideas in the blockchain industry, a general confusion shrouds so called ‘smart contracts.’
New technology made possible by public block chains, smart contracts are difficult to understand because the term partly confuses the core interaction described.
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While a standard contract outlines the terms of a relationship (usually one enforceable by law), a smart contract enforces a relationship with cryptographic code.
Put differently; smart contracts are programs that execute exactly as they are set up to by their creators.
First conceived in 1993, the idea was initially described by computer scientist and cryptographer Nick Szabo as a kind of digital vending machine.
In his famous example, he explained how users could input data or value, and receive a finite item from a device, in this case, a real-world snack or a soft drink.
In a simple example, the golden coin users can send ten golden coins to a friend on a certain date using a smart contract.
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In this case, user would generate a contract, and push the data to that contract so that it could perform the desired command.
But these new tools aren’t intended to be used in isolation. It is considered that they can also form the building blocks for ‘decentralized applications’ and even whole decentralized autonomous companies.
Traditional vs. Smart Contracts
Traditional Contracts
Traditional physical contracts, such as those created by legal professionals today, contain legal language on vast amounts of printed documents and heavily rely on third parties for enforcement.
This type of enforcement is not only very time-consuming but also very ambiguous. If things go astray, contract parties often must rely on the public judicial system to remedy the situation, which can be very costly and time-consuming.
Smart Contracts
Smart contracts, often created by computer programmers with the help of smart contract development tools, are entirely digital and written using programming code languages such as C++, Go, Python, Java.
This code defines the rules and consequences in the same way that a traditional legal document would, stating the obligations, benefits, and penalties which may be due to either party in various circumstances. A distributed ledger system can automatically execute this code.
How Smart Contracts Work?
Smart contracts, also known as smart properties and chaincode, are agreements that have been codified inside a blockchain. Smart contracts are code — simple “if-then” and “if-then-else” statements.
They’re created with code that is built into a block chain. Ethernet and Hyperledger Fabric are popular block chains for creating smart contracts.
The block chains record data on their smart contracts and have a history of the smart contracts’ balance of crypto currency and a history of all their transactions.
Smart contracts have an internal memory containing their code. The code gets executed when predetermined restrictions are met. These restrictions could be internal or external to the smart contract.
If the code for the smart contract needs an external source to determine if it has met its restrictions, it will use an oracle (a source of knowledge).
An Oracle could be a data feed for weather, for example.
This would be useful if the smart contract were executing an insurance contract for crops. Following this example, the contract would look something like this: “If the temperature drops below 32 degrees for more than one hour, release $5,000 to John.”
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