What is a Smart Contract?
A smart contract is a blockchain-initiated contract that is executed digitally once certain conditions are met.1 Since no third party is involved, smart contracts are automated and executed with greater efficiency and less time.
How do smart contracts work?
Smart contracts are codes that use blockchain as the interface. When certain conditions are met, the codes run, and tasks are executed. These contracts are set up mutually by the parties involved and are not subject to the assessment by any other party. Since it leverages blockchain technology, it’s difficult to tamper with the conditions outlined in these contracts. These contracts have multiple applications that include making payments for services, registrations, and the generation of unique identifiers.
Since the need for any intermediary is eliminated, smart contracts are cost-effective. They can easily be set up using previously created templates and are easily customizable. Decentralized in nature, they don’t rely on local laws for framing the terms and conditions.
One caveat is that they may not be legally enforceable due to blockchain's lack of clarity. Since parties involving multiple jurisdictions can be involved, these contracts can become more complicated while seeking judicial intervention.
Example
A smart contract can be established using a blockchain network that transfers a property to the person who makes the necessary payment. As soon as the payment is received, the property's title is automatically transferred to the buyer.
Sources
1 Smart Contracts. IBM.
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