Blockchain Technology: Know About Smart Contracts
Smart contracts is a significant component in the blockchain technology. If you are a newbie to the blockchain technology, you might have bewildered about the term “smart contracts”. As blockchain is a decentralized system, smart contracts provide a secured and transparent term of contact between the buyer and the seller. Read on to know more about smart contracts.
What is smart contracts?
A smart contract is a computer protocol, which exists within a blockchain network. The contract between the buyer and the seller is written in lines of codes to digitally facilitate credible transactions without third parties. Smart contacts allow for trusted transactions between anonymous parties without the need for a legal system. Within the blockchain network, which is decentralized, smart contact transactions are transparent and irreversible.
Smart contracts proposed by Nick Szabo in 1994. Nick Szabi is an American scholar and cryptographer founded the “Bit gold” a virtual currency. He realized that the blockchain network can be used for smart contacts, a computerized code that executes the terms of a contract. In a decentralized ledger, smart contacts can be stored as a computer code, with transparency, security, encryption, and enforceability.
How do smart contracts work?
Smart contracts are codes which contain the terms of contracts between the parties. The individuals involved are anonymous but the contact is the public ledger. For profound understanding, here is an instance of how smart contacts work.
Say Mike owns a car and the car has its own blockchain address(public key) 1423Y. Now, Mike wants to sell his car and identifies himself with his blockchain address(public key) 264566. He uses a smart contact to define the terms of the sale signing it with his private key. The smart contracts contain Mike’s account number 264566, the car’s ID 1423Y and the cost of the car. Jane wants to buy a car and she finds Mike’s listed on the internet. She signs the contract with her public key 178911, transferring the said cost of the car from her blockchain address to mike’s blockchain address.
The smart contact is verified by each node on the blockchain network, checking if Mike is the owner of the car and if Jane has enough money to buy the car. If the network verifies all the information are true, Jane can automatically get the access code to the smart garage lock. The blockchain will register Jane as the new owner of the car. All the transactions are made public and everyone on the blockchain can view the owner of the car thus eliminating any third-party involvement.
Smart contracts provide a secured transaction of exchange of money, property or anything of value without any conflicts. This computer protocol code standardizes the transaction rules and defines the rights and obligations to which parties to a smart contract consent. Smart contracts are now widely used in supply chain management, banks & insurances, eGovernment, IoT, digital industry, energy sector, and in the accounting & auditing sector.