Kryptolesson #13

What are Smart Contracts?

A smart contract is a computer program running on a blockchain intended to allow network participants to interact with each other in a trustless and decentralized manner, it is in principle an agreement in form of code. Smart contracts only execute if all encoded pre-specified conditions are met. Thus, allowing network participants to engage into more complex interactions on chain, without needing to know or trust their counterparty, and without requiring a central authority to validate the provided information. Once executed the underlying transactions are recorded in the blockchain and remain immutable. Smart contracts are blockchain analogues to physical world contracts and can be deployed similarly, with the difference that no intermediary is needed to guarantee enforcement settlement, or verification.

Let’s assume two people don’t know and trust each other but want to interact economically, they would usually need at least one trusted third party to serve as an intermediary to verify, authenticate, settle, and enforce their agreement. Through smart contracts counterparties just need to agree on the terms, the program verifies whether all conditions are met, and executes the underlying agreement. Smart contracts open the door for direct and trustless peer-to-peer interaction and reduce transaction costs in form of fees. Use cases are as broad as use cases for contracts in the physical world and include sale of goods, financial services, insurance policies, transfer of access rights, financial derivatives, insurance policies, credit enforcement, and crowdfunding agreements among others. Smart contracts are at the heart of blockchain applications other than transactions.

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