What are Smart Contracts and How do They Work?

smart contracts

What are Smart Contracts and how do they work?

A smart contract is neither a written nor a verbal agreement in the literal sense. It is a piece of software which can execute predetermined rules for negotiating the terms of a digital business transaction with automatic verification. 


What makes it all possible?

To comprehend how these contracts work you need to appreciate what a blockchain is. A blockchain is a digitally maintained ledger in which transactions get registered chronologically with open access.


Blockchain plus smart contracts equal trust

Coupled with smart contracts the new technology removes the reliance on centralized digital transactions. Everyone subscribing to a particular smart contract will be aware of the deals in their network because there will be transparency. Thus, even untrusting parties are now able to have dealings with one another with complete confidence. The chain network would immediately notice any attempt to alter the smart contract, and it could be directly isolated.

In this way, the overlap of smart contracts with this chain network type of technology creates in effect a single extensive secure computer network which may have a limitless number of applications in theory. The new technology is about to revolutionize everything from our money to the way we vote. Its appeal is that it is all achievable without the risk, expense and trust issues which have been a burden up to now.


Cryptocurrency: Bitcoin and Ethereum

Cryptocurrency is made possible because of this technology. Each block is secure from tampering and revision. The blocks are time-stamped and linked to their predecessors. That makes it possible to know who owns the currency and when it was last in their possession. Equally or perhaps even more critical is the issue of counterfeiting. It is an impossibility with these digital coins.

Although, Bitcoin has been around longer than Ethereum. The one thing Ether can boast over Bitcoin is the fact that it employs smart contract technology. Many observers believe that will be the quality which will allow Ether to leapfrog Bitcoin in popularity. This single feature gives the Ether coin much more versatility. In theory, Ether can be programmed to invest, spend and save itself.


The future will be on the blockchain

Companies are today considering how they can make the best use of this new technology to add value to their operations. They are already developing software to allow up to the minute tracking of debits, credits, and other transactions. There will be astonishing changes coming to society over the next few years due to this technology.