Blockchain-based Smart Contracts and How They Work
Smart contracts are how transactions on a blockchain are executed without human intervention. These are software programs designed to run based on underlying conditions or criteria and are extensively used in the blockchain space to ensure seamless trading between two parties without intermediary involvement.
So, what are smart contracts and how do they actually work? Let’s find out.
What is a smart contract and why is it needed?
A Smart Contract is a computer code written using a programming language and to execute automatically when a specific condition is met. The program contains rules and conditions for the execution of a specific transaction.
In the blockchain space, smart contracts are used to execute middleman-free agreements between trading parties. For example, a person looking to buy a car online on the blockchain will use a smart contract to make the purchase agreement with conditions to execute once the payment is received by the seller. This ensures the transaction is performed without any middleman and is both secure and cost-effective.
As you may already know, blockchain works on the principle of peer-to-peer networking and operates without intermediaries. Smart Contracts are a very crucial part of the blockchain network, as they enable the network users to perform P2P transactions without intermediaries. By using a simple, written code, users can trade limitlessly and securely on the blockchain.
Benefits of smart contracts
There are a number of benefits of smart contracts in blockchain. For one, they are designed to be executed automatically and do not require any external assistance. This further reduces the cost and time of transactions as well as increases security. This is one of the reasons why blockchain transactions are so secure.
Smart contracts are high-level programming codes encrypted using cryptography. Also, because they are executed automatically, transactions on a blockchain are super fast.
How smart contracts work
This is the most interesting part.
Smart Contracts are similar to traditional agreements, where the trading parties define the various conditions and rules of the agreement. The only difference is that smart contracts are written using computer code and designed to execute automatically, unlike physical agreements that are executed by middlemen.
The conditions of the contract are written in statements like, if — then, and converted into a code that works on blockchain.
The contract executes automatically when the pre-set conditions are met or the statement is validated. For example, once the seller receives payment from the buyer, the car’s ownership will be automatically transferred in the name of the buyer.
Applications of Smart Contract
Though smart contracts can be practically used in any industry where transactions or trading are performed, they are most commonly used for financial transactions, payments and various other transactions where security is a major concern.
For example, the Libra Ecosystem is a new-age e-commerce system that allows users to pay in cryptocurrencies for their online orders. The platform uses blockchain smart contracts for middlemen-free and trustless execution of transactions between buyers and sellers. This not ensures e-commerce transactions and payments are performed quickly and at a much lower cost but also it helps strengthen communication between brands and their consumers. Moreover, blockchain-enabled smart contracts will bring transparency to e-commerce transactions as well as provide a better way for customers to get quick resolutions of their concerns.
Other possible applications of smart contracts in blockchain include increased transparency in supply chains, middlemen-free transactions, global access, quick & affordable international payments, among others.