Smart Contract, also called a self-executing contract, blockchain contract or digital contract, is a set of instructions that automatically performs the tasks under the agreement, which parties have committed to. By being immutable and cryptographically secure, Smart Contracts give us the security of Blockchain Technology, that is, they provide distributed, trustworthy calculations.
Smart Contracts help us perform business agreements in a transparent, conflict-free environment by eliminating the need for a middleman. It defines the rules and consequences of the agreement, like a traditional contract, but it enforces the obligations of the agreement automatically. This automated execution defines a smart contract.
Insurance Policies, Copyrighted Content, Financial Data Recording and Trade Finance are just some of the examples where blockchain based smart contracts are being used.
How does a Smart Contract work?
Step 1 – Identify the Agreement – The concerned parties come together to decide the business process and the desired outcome.
Step 2 – Identify the terms – The terms and consequences around the agreement are articulated. These parameters become a part of the smart contract.
Step 3 – Writing the Business Logic – The code is written in a computer language, which performs the conditions of the agreement automatically.
Step 4 – Encryption – Smart contracts are encrypted to provide safe authentication and communication between the parties relating to smart contract.
Step 5 – Executing and Processing – After consensus is reached on authentication and verification, the smart contract is written to a block and code is executed.
Step 6 – Network Updates – Once the smart contract is executed, all computers in the network update their ledgers to reflect the new state. The records written to the blockchain are immutable.