A smart contract is just like an old-fashioned verbal or paper contract except with a smart contract, the conditions can be met digitally. Smart contracts are not new, but they are newly relevant (and a bit overhyped) because they are an awesome, non-cryptocurrency use of blockchain technology.
You’ve likely heard of blockchain. It’s the underlying technology that powers bitcoin and other cryptocurrencies. Everyone is talking about blockchain because distributed ledgers (the term of art for blockchain’s underlying technology) offer an exciting new way to transact business without a central authority.
Blockchain Is Information Written in Stone
Carving a writing into a stone feels permanent (some writings in stone have lasted for millennia). You can easily tell if a writing carved in stone has been altered, and, maybe most importantly, the stone does not care what you carve (write) on it. A blockchain is a digital stone. It lives on a self-healing network distributed over a large number of computers. It is, for all intents and purposes, permanent. You can easily tell if the information has been altered, and blockchains do not care what information you add to them.
Read More: In case you missed it, here’s a primer I wrote about blockchain.
A Smart Contract Is a Vending Machine
Vending machines are a good metaphor for smart contracts. You identify the item you wish to obtain. You put your money in the slot. The vending machine determines if it is the correct amount of money. If it is not the correct amount, the vending machine asks you for more or offers to return the money you have already inserted. If it is the correct amount, the vending machine releases the item you selected. Smart contracts work exactly the same way. You state your conditions, someone meets the conditions, and the transaction is completed.
Smart Contracts in Action
In practice, smart contracts are self-executing programs that automatically check the rules of the transaction, verify and process the transaction, and, in some cases, enforce the obligations of the parties. As you can imagine, this type of automation has the potential to dramatically increase productivity and lower costs.
