Smart Contract: A computer protocol on a blockchain that regulates the terms of an agreement between two parties. The contract is controlled by the code and is only triggered by the circumstance of execution, which eliminates the third party from participation.
The concept of Smart Contracts was introduced by a computer scientist, law scholar, and cryptographer, Nick Szabo, in 1994. He was the first who suggested using the distributed ledger to store contracts. Szabo is also known in a crypto world as the creator of Bit gold.
Technically the Smart Contracts are the same as the material world contracts with the only difference that they are completely digital. It is a tiny computer program that is stored on a blockchain. The main goal of Smart Contracts is to be self-executed and eliminate the third party between sides making a deal. Because the Smart Contracts are stored on the blockchain, everything is completely distributed. With this technique no one is in control of the contract’s terms, that is to say, the two parties put their trust in technology, and not in the third party.
But why should we trust the technology like the Smart Contract? The answer is the blockchain! Because they are stored on a blockchain, they are immutable and distributed. Being immutable means once the Smart Contract is created it can not be changed. Being distributed at its turn means that the output of the contract is validated by every participant on the network. A single person can’t deviate the contract because other members will spot the change and mark it as invalid.
In his paper, Szabo wrote:
“These new securities are formed by combining securities (such as bonds) and derivatives (options and futures) in a wide variety of ways. Very complex term structures for payments can now be built into standardized contracts and traded with low transaction costs, due to computerized analysis of these complex term structures.”
The creator and co-founder of the Ethereum Foundation, Vitalik Buterin, explained Smart Contracts mechanism as “an asset or currency is transferred into a program and the program runs this code and at some point, it automatically validates a condition and it automatically determines whether the asset should go to one person or back to the other person”.
Numerous blockchains support Smart Contracts today. The Ethereum blockchain is the most popular one. It was specifically created and designed to support Smart Contracts. The Contracts can be programmed and designed in a special programming language called Solidity. The Bitcoin network also has a support for Smart Contracts, although it’s much more limited.
What’s the role of cryptocurrency here? All the Smart Contracts are powered by the digital currency, in a form of transactions on a blockchain. Another interesting fact that it can support multiple participants, for example, to instantly register multi-ownership, which makes the traditional buy-sell approach outdated.
Today Smart Contracts guarantee autonomy, trust, secure backups, and accuracy. They are used to automate operations in a number of industries.