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What is a Smart Contract?

What is a Smart Contract?

A Smart contract is very much similar to that of a normal contract in many aspects, but it is more of a computer program that uses the system of a distributed ledger. With the help of distributed ledger, a digital contract stores the information within the Blockchain. In simple words, a smart contract is nothing but a digital version of the usual contract but has some additional features and advantages. The term Smart Contract was first introduced by Nick Szabo, who is a famous American cryptographer and computer scientist. He coined the term in 1997, which was almost a decade before the invention of Blockchain technology.

Smart Contract explained

Elimination of middlemen is the most attractive feature of a Smart Contract. In an ordinary contract, there are two parties and a middleman who earns a certain amount of commission for carrying out the process. The middleman must be trustworthy and legit, as both the parties rely upon him for the execution of the contract. Smart Contract completely eliminates the middleman and thereby reducing the transaction cost. As it uses a distributed ledger, every user of the platform can see and validate the contract. Blockchain stores the contract and passes or rejects it according to the programme rules.

The Vending Machine Analogy

There is a famous analogy that is used to explain what a Smart Contract is, in the easiest way possible. In a vending machine, the user puts in the money and the desired item pops out. Similarly, a Smart Contract is like a vending machine and the user puts in the needed amount of money and the contract is processed. The Blockchain serves as a catalyst for the whole process.  The service can be utilized by banks and insurance companies and so on. There are two parties, which are the supporters and the product team. The supporter raises the money and gives to the smart contract, and if the contract is properly funded, transfers the fund to the creator.

Why Smart Contracts?

There are lots of advantages to Smart Contracts when compared to the normal one. Elimination of third parties is the biggest advantage of them all. They are also immutable. Once a contract is created, it cannot be changed or tweaked by anybody. This gives added assurance to the user. Since it used distributed ledger technology, the contract is open to a large number of users and is checked by all of them. Hence, they are self-verifying and also self-executing. The transaction fee is also less. There are also certain downfalls like bugs and hackers, which is applicable to any online service. There are platforms like Ethereum which is specifically created to make smart contracts. They use programming language known as Solidity to execute their contracts. Bitcoin also allows the function of Smart contracts but to a limited extent.