Smart Contracts

Smart contracts represent one of the most significant innovations brought about by blockchain technology. They are essentially self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code.

Understanding Smart Contracts

First, let's understand what smart contracts actually are in more formal terms.

They run on a blockchain network, where they are stored, replicated, and executed without the oversight or intervention of a central authority. When predefined conditions are met, smart contracts automatically execute the encoded actions, which may include transferring funds, issuing tokens, or recording data.

Conceptually, smart contracts follow a simple "if/when...then..." logic written into code on the blockchain. For example, a smart contract for a bet might say, "if Team A wins the game, pay Alice 10 ETH (Ethereum coins); otherwise, pay Bob 10 ETH." When the outcome of the game is known, the smart contract automatically executes the relevant transaction.

Smart Contract Benefits

• Transparency: All steps are recorded on the blockchain, accessible to authorized parties;
• Efficiency: Automates manual tasks, reducing transaction time and paperwork;
• Security: Funds held securely in escrow until conditions are met, minimizing fraud risk;
• Trust: Eliminates the need for intermediaries, reducing potential disputes.

Smart Contract for Selling a House

In order to better understand smart contracts, let's take a look at an example of selling a house.

Contract participants:

• Seller: Owns the house and sets the terms;
• Buyer: Offers to purchase the house based on the terms;
• Escrow: Holds the buyer's funds securely;
• Title Registry: Holds and updates the official ownership record.

Contract terms:

• Purchase price: Agreed-upon value of the house;
• Contingencies: Conditions to be met before sale finalizes (e.g., inspections, approvals);
• Deadlines: Timeframes for each action;
• Transfer of ownership: Triggered upon fulfilling all conditions.

The process of selling a house through a smart contract begins with the seller creating the contract, specifying terms such as the sale price and incorporating an escrow mechanism. The buyer then deposits the agreed purchase amount into the escrow. The smart contract automatically checks that the deposit matches the sale price.

Both parties proceed to fulfil any agreed-upon conditions, like property inspections. Once all conditions are satisfied, the smart contract executes the secure transfer of funds from the escrow to the seller and updates the property's title to reflect the new ownership, completing the sale. This entire transaction is recorded on the blockchain, ensuring transparency and security.

Let's take a look at the following illustration to clarify this process:

Blockchains Supporting Smart Contracts

Despite being available in Bitcoin, smart contracts there are rather limited compared to other platforms due to Bitcoin's scripting language, which is designed for simplicity and security over flexibility. The first blockchain to offer full support for complex smart contracts is Ethereum (ETH), using Solidity and Vyper as its primary programming languages. Moreover, Ethereum has become the leading platform for decentralized applications (dApps), with a large and active development community.