Related Terms
DEFINITION
Smart Contract
A smart contract is a self-executing program typically stored on the blockchain that automatically executes an agreement once certain conditions are met. This means that two anonymous parties can sign a contract without the need of an intermediary, allowing the blockchain to remain decentralized. Smart contracts are widely used in industries such as finance, insurance and real estate to automate payments, asset transfers, and compliance checks.
Synonyms
Self-executing contract
Acronyms
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Synonyms
Self-executing contract, automated ledger contract
Acronyms
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Examples
A person is performing a real estate transaction through the blockchain. The buyer deposits the agreed upon amount of cryptocurrencies into the smart contract. The seller then transfers the property deed to the buyer also through the blockchain. Once both the deed and the funds are in the smart contract, the smart contract is executed, releasing both the funds and the deed and recording the ownership transfer.
FAQ
How do smart contracts work?
Smart contracts are basically programmed on an “if-then” logic. So, when X conditions are met, perform Y. In the example above this would look like: IF “the appropriate funds have been delivered” and “the deed to the property has been delivered” THEN “release the funds, release the deed, and transfer ownership to the buyer”.
What are the advantages of smart contracts?
Smart contracts eliminate the need for intermediaries, keeping the blockchain decentralized, reducing costs and processing time, and improving transparency.
What are the risks associated with smart contracts?
Smart contracts being immutable is a double-edged sword. This is because while hackers can’t change the contracts, neither can anyone else. This means that mistakes in the code can’t be corrected once the contract has been deployed. Adapting smart contracts also requires technical expertise and compatibility with existing legal frameworks, which isn’t guaranteed.
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