What is a Smart Contract in Blockchain Tech and how does it work?

What is a smart contract in blockchain, and how does it work? This article deeply dives into these basic questions and builds a knowledge base to understand these concepts.

The term cryptocurrencies (which most of us are aware of by now) is all based on blockchain. This technology has significantly impacted several industries by creating a tamper-proof register for transactions. This disruption eradicates the need for the middleman, which increases the safety, reliability, and speed of the process.

The advancement in the use of blockchain technology went further to give birth to more applications apart from the digital currency, one of which was the smart contract. So, what is a smart contract in blockchain, and how does it work? This is quite a common search made by netizens at the time of writing, and below we go deep dive into them.

What is a smart contract in blockchain?

Think of them as contracts being written in line with codes and being finalized in a “self-executing” fashion. These contracts are executed when certain conditions are met, just like a traditional contract between two parties in the real world. But instead of writing and saving it down on paper, this contract is saved on a line of code belonging to a blockchain network. That line of code is the Ethereum network, the second-largest blockchain decentralized network.

They are Automated Contracts

To put it in a literal definition, such smart contracts are self-executing and automated contracts operated on blockchain networks and are only executed when certain predetermined terms and conditions are met. This happens without any intermediary’s involvement or time waste in the process of contract competition and poses many other implications.

How Smart Contract Work?##

These technologies are all next-generation mediums with foolproof security, yet they work on the basic “when, if, then...” statements written in their code. They work by automating a certain set of actions when some events occur, for instance, a transfer of ownership of an asset. The requirements are predefined in the code and checked with procedures once a solution that fulfills them has been entered.

For instance, Party A purchases goods from Party B, and payment has to be made from Party A to Party B. With smart contracts, both the payment and the goods are monitored under the smart contract. The release payment to the seller occurs under a smart contract once the buyer receives the product, hence meeting the set conditions. Essentially, these smart contracts work to uphold the terms of a contract as pre-specified requirements, which is exactly what happens in offline contracts accustomed to us, but the only difference is the security of blockchain.

The above-stated example can be explained in a step-by-step process to further clarify the question what is a smart contract in blockchain and its working:

1. The first stage is the purchase order, which is simply the confirmation of the sale by both parties—the buyer and the seller—wherein the usual necessities of price and agreed delivery date are illuminated. The buyer transfers the agreed value in digital currency, most often "Ether”, to the address identified with the smart contract.

2. In the next step, the smart contract code checks whether or not the conditions of the sale have been met, for example, whether the payment in the agreed cryptocurrency has been received.

3. Next, the reward amount disappears, and the agreed terms are implemented using the program of a smart contract. For instance, it passes ownership of the product to the buyer on delivery of goods or at an agreed date.

4. Next, it is checked if the buyer acquires the product while the seller has been paid for the same agreed amount.

5. Once the conditions are met, the competition stage is triggered. Each of the parties can check whether a smart contract has already met and enforced the set conditions of the contract.

In this entire process, transparency is maintained since the Ethereum currency and its network are extremely secure and transparent in their operation. During the entire process, circular information like the transfer of ownership of the product and payment details are easily accessible. Due to Ethereum, the transacting parties maintain a sound, safe, and permanent record of the transaction.

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Wrapping Up:

To conclude the topic “What is a smart contract in blockchain and how does it work" we can state that these smart contracts are secure transactions with added enforced contractual specifications that are only met when these specifications are met. These transactions are done on an Ethereum blockchain network that maintains a secure and transparent medium for the execution of such contracts.