What Is a Smart Contract: Everything You Need to Know

A smart contract is an automatic self-executing type of contract. It works largely without human intervention and potentially offers more security and efficiency than traditional contracts.

A smart contract is a blockchain-based technology with which contracts and the conditions linked to them can be digitally shown and monitored. Despite the fact that this technology is still relatively new, it’s already being used in practice because it offers a number of advantages over traditional contracts.

Conclude Contracts Without a Middleman

A traditional contract usually involves some form of a middleman. This can be a landlord or a clerk. A smart contract doesn’t require this person. It’s replaced by the program code of a smart contract. All the prerequisites and conditions that are required for a valid contract are defined here.

It may also replace complex contracts. For example, a party requires a notary, which greatly simplifies automated contracts. However, the involvement of the notary becomes completely unnecessary, as the pre-programmed conditions and rules provide the necessary credibility.

Automatic Monitoring and Execution of Contracts

With traditional contracts, someone (e.g. a clerk) always has to check whether all parties involved comply with the conditions agreed in the contract. In the case of smart contracts, this ‘monitoring’ occurs purely on a technical level. The conditions are recorded programmatically and can therefore be checked automatically at any time.

The contract is usually composed of individual ‘if-then’ scenarios that are executed automatically. If person A fulfills condition X, the action following X is automatically carried out. Smart contracts are therefore considered to be very efficient and also have the potential to significantly reduce staff costs for managing contracts. However, the technology is limited to what was taken into account in the technical implementation. Thus, unexpected scenarios that require human intervention may take place.

Potentially Greater Security with a Smart Contract

Smart contracts should provide greater security than traditional contracts and be more reliable. People make mistakes and can be biased. A computer system, on the other hand, decides independently on the basis of the programmed rules.

However, there is also a weak point here. A poorly programmed system may have security gaps and can be hacked. However, the decentralized structure of blockchain apps makes hacks extremely complicated and therefore very unlikely.

What other interesting facts about smart contracts do you know? Feel free to share your knowledge in the comments!

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