Smart contracts are fully automated, self-executing digital contracts which exist on a distributed, decentralized blockchain network. These digital contracts can fulfill all operations carried out by traditional contracts with the added benefit of blockchain technology. Because smart contracts utilize distributed ledger technology, they require no third-party intermediary to be carried out. Moreover, the terms of the agreement are set only between the parties involved and the contract itself executes the terms of the agreement when the conditions are met. Because of the fundamental characteristics of smart contracts, there is less room for error, no paper trail required, and no third-party control. In addition, they are far more cost efficient on account of the eliminated intermediary. Here’s how it works. A smart contract is a piece of code which contains the terms of a contract. This code is integrated into a blockchain. If the conditions of the contract are not met, the smart contract is invalidated and terminated. If the conditions are met, the code automatically executes the terms. The network of computers which make up a blockchain are called nodes. These nodes work to guard and execute smart contracts. This eliminates the possibility of error or fraud. Furthermore, the data of all present and past smart contracts is stored unchangeably. This record acts as objective proof of a contract’s details. Smart contracts can be used in many ways. They can be as simple as an employment agreement, in which funds are released to an employee after a task or time allotment is completed. They can also cover legal documentation, governance and voting, crowdfunding, sharing (like Uber), and so much more. A good example of a use case for smart contracts in crowdfunding. If a startup is looking to make a certain investment goal, investors will enter into a contract when they put forth their funds. If the goal is met, all funds will be automatically released to the startup. If not, funds will be automatically returned to the investors.
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What are smart contracts? Why use smart contracts? This guide covers it all.