Smart contracts are self-executing contracts through which the terms of agreement between the buyer and seller is directly written into lines of code. These codes and the agreements contained in the contracts exist across a distributed and decentralized blockchain network. Smart contracts allow for trusted transactions and agreements to be carried out among two anonymous parties with the absence of a central governing body, central authority, legal system, or external enforcement. They render transactions to be irreversible and transparent. Blockchain initially developed for the Bitcoin has slowly transcended in to various other industries and aspects of technology.
Blockchain is far greater than just Bitcoins and cryptocurrencies. The abundance of security achieved in crypto currencies have demonstrated the world that this not so new trend of blockchain technology can provide efficient and intangible technological advancements, on the similar likes of how the internet has grown this far. Also blockchain is a powerful technology that is capable of executing complex operations, understanding more than just how many cryptocurrencies you currently have with you in your digital wallet. This is where the idea of smart contracts kicks in. Smart contract has started becoming a cornerstone for most major enterprise blockchain applications; it has a high probability of becoming one of the core pillars of the blockchain technology
Smart contracts are created by computer programmers with the help of smart contract development tools available that are digital and compiled using programming code languages such as C++, Go, Python, Java. These codes define the guidelines and consequences the same way a traditional legal document does. Stating the obligation, penalties and benefits that the contract implies with either party in different circumstances; a distributed ledger system executes these codes automatically
Because smart contracts work like computer programs, it is very important that they do exactly what the parties want them to do. This is achieved by inputting the proper logic when writing your smart contract. The code behaves in predefined ways and doesn’t have the linguistic nuances of human languages, thus, it has now automated the “if this happens then do that” part of traditional contracts.
The code is then encrypted and sent out to other computers via a distributed network of ledgers (i.e. Distributed Ledgers). If this is done via public permission less blockchain such as Bitcoin, the contract is sent out similar to the way that a network update of a Bitcoin transaction would occur. This can also be done in permission or hybrid distributed ledger platform such as the R3 Distributed Ledger.
One the computers in this network of distributed ledgers receive the code, they each come to an individual agreement on the results of the code execution. The network would then update the distributed ledgers to record the execution of the contract, and then monitor for compliance with the terms of the smart contract. In this type of system, single party manipulation is overrated because control over the execution of the smart contract is no longer possible because execution is no longer in the hands of a single party.