A smart contract is a computer-based protocol which automatically executes in order to control or document legally relevant events and actions according to the terms of a legal contract or agreement.
In simple terms, smart contracts are programs stored on a blockchain ledger that run when predetermined conditions are met.
Smart contracts are used to automate the execution of an agreement so that all parties can be immediately assured of an outcome without their direct involvement thus saving time and money.
Smart contracts are deployed when a transaction is sent from a relevant wallet.
The transaction includes the compiled code for the smart contract together with the receiver address.
The transaction is then included in a block added to the blockchain where the smart contract code will execute and establish the initial state of the smart contract.
Once deployed, contracting parties cannot make updates to the contract.
Smart contracts on a blockchain can store random states and execute random computations.
End clients having a contractual relationship with the sender interact with smart contracts through transactions.
The most popular and first electronic transaction made with smart contracts is Ethereum although recent years have witnessed more sophisticated and versatile entrants to market.
Ethereum was the first platform to launch smart contract functionality and to date powers the lion's share of smart contract applications on the market today. For example, 80% of all DeFi applications operate on the Ethereum network.
There are many benefits for using smart contracts in business today. Some of the major advantages include:
Automation - Once set up a smart contract will self execute when set conditions are met, greatly reducing transaction steps usually involved in traditional contracts.
Trust - Smart contracts allow for high levels of trust between parties as conditions are agreed upon and will not execute until these conditions are met. Smart contracts are automated and stored on the blockchain making them impervious to tamper and manipulation.
Security - Because the smart contract is written in cryptographically secure code, the smart contract is trusted between involved parties and greatly minimizes time needed for any dispute resolution or potential issues.
Savings - Smart contracts bring massive transaction costs and time savings to business as brokers, intermediaries and middlemen are no longer needed.
Smart contracts have many use cases and the widespread adoption of smart transactions is highly likely to happen.
Smart contracts are currently being used to revolutionise financial services like trading, investing, lending and borrowing.
In future smart contracts will be used in applications for gaming, healthcare and real estate.
A good example is the house purchase process. Once all documents have been received, deposits paid and conditions met smart contracts will execute and the deeds of the house will be exchanged.
Decentralised Applications, or dApps for short, are applications that are built on a blockchain led network.
dApps allow nodes and computers on a decentralised network to simultaneously seed, feed and share data in order to perform a specific predetermined event or task.
Although still a relatively new technology, dApps will enable mobile applications to become more evenly distributed and more secure allowing for a greater wealth of data usage in a more democratic way.