Smart contracts are self-executing contracts with the terms of the agreement between parties directly written into lines of code. They are stored on a blockchain, and automatically execute when predetermined terms and conditions are met. Smart contracts were first proposed by computer scientist Nick Szabo in 1994. However, they have only become a reality with the development of blockchain technology - a distributed ledger that maintains a continuously growing list of ordered records called blocks. Blockchains allow multiple parties to have a shared and trusted record of all the transactions in a network without the need for a central authority. The blockchain's consensus mechanisms ensure that the shared ledger is secure, transparent and immutable. These properties are ideal for smart contracts.
Smart contracts automate the execution of contracts and make the overall process more transparent, secure, and efficient. Once deployed on the blockchain, they run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference. This automation eliminates the need for intermediaries and counterparty risk. For example, a smart contract can automatically transfer funds between parties once certain conditions within the agreement are met. If a product is received and verified, the payment is released. No intermediary organizations are needed to validate or complete the transaction.
The blockchain's immutability ensures that the smart contract will always run as intended. The code and terms of the contract cannot be modified once deployed, and the transaction history is permanent, transparent and incorruptible. No party can tamper with or manipulate the smart contract after it has been deployed. This prevents issues like fraud, censorship or third-party interference that could compromise the integrity of the contract.
Smart contracts do not require trust between parties to function. The blockchain's consensus mechanisms ensure that the smart contract will execute impartially and objectively, without needing to trust or rely on any individual party. The parties involved only need to trust the blockchain network, rather than each other. This allows people and organizations who do not know or trust each other to interact and transact with confidence.
Smart contracts have the potential to greatly impact the future of commerce and legal systems. By combining blockchain technology and self-executing code, smart contracts offer a secure, efficient and seamless way of facilitating trusted transactions and agreements between parties without the need for traditional legal contracts and enforcement mechanisms. Although still in their infancy, smart contracts are poised to disrupt and redefine how business is conducted in the digital age. They take automation, trust and efficiency to the next level and open the door to a world of opportunity.