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What is a Smart Contract?

In a blockchain, you can put a set of transactions, but you can also store code that resembles the logic and rules of a real contract.

A Smart Contract is a computer program stored in a blockchain that guarantees the fulfillment of an agreement automatically and safely, without the need for third parties. Smart Contract technology is not new, but how it is applied is. 

Smart Contracts run exactly as programmed. They are self-executing with specific instructions or clauses written on their code which execute when certain conditions occur. For example, when two people participate in a Smart Contract that implements a bet, they’ll send the money to the Contract with their selected winner’s choice. The Contract will be responsible for transferring the amount deposited by the two people to the address of the person who has guessed right. The action of sending money occurs using the native token of the blockchain where you deploy the Contract. 

Smart Contract Automation

Any agreement between individuals or corporations may have clauses whose execution is automated with a Smart Contract deployed in a blockchain. In the case of conflicts, the traditional solution is to go to court to demand compliance with the Contract. Another is looking for compensation for the damages caused, which implies time and costs for the parties. The risk of contract execution reduces significantly and is efficiently solved with Smart Contracts and Blockchain technology. It is an automated mechanism that guarantees the execution of the Contract. Resolution is quick, safe, and cheap when certain agreed conditions are met. 

Once you program, test, and deploy a Smart Contract, the execution of the Smart Contract does not need a central authority or intermediary. Thus, many commercial exchanges are more efficient by reducing the transaction costs associated with the default of the counterparty and the derivatives of going to court to claim compensation in case of default. Smart Contracts avoid the burden of interpretation because you write them using a computer programming language. This means that the terms in the Contract are pure statements and commands in the code that forms it. For example, Cardano uses the Haskell programming language, making it easier to test and achieve solid logic to enforce the Contract. The Ethereum platform uses a Javascript-derived language named Solidity

The blockchain provides a single ledger as a source of trust and strips possible complications in communication and workflow because of its precision, transparency, and automated system. 

Smart Contract Execution

A Smart Contract that runs on a blockchain must be immutable and can run through multiple nodes without compromising its integrity. As a result of which, the Smart Contract functionality needs to be deterministic, terminable, and isolated. Deterministic means that the contract output will be identical if given identical inputs. Terminable implies that the Contract must have an exit when specific conditions occur, or its execution exceeds a time limit. You need Isolation to evade secondary effects on the platform where you execute the Contract. Since any contract may knowingly and unknowingly contain bugs, you must execute the Contract in an isolated sandbox. 

There are lots of Smart Contract use cases. We’ll review them in a later post. If you need more profound knowledge about blockchain, you can enroll in any blockchain courses.

For an excellent graphic explanation of how Smart contracts work, you can check this infographic from Raise P2P Lending Platform. They also have a crystal clear Beginner’s Guide to Smart Contracts.

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