What is a Smart Contract and How It Works?

Smart contracts enable secure, automated execution of agreements on blockchains, ensuring transparency and efficiency. They streamline workflows, reduce costs, and enhance reliability.

By Brad Nakase, Attorney

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Table of Contents

1. How do smart contracts work?

2. Smart contract advantages

How do smart contracts work?

Formed digitally on a blockchain, “smart contracts” trigger automatic execution upon fulfillment of certain requirements. By eliminating the need for a third party and the associated delays, smart contracts streamline the execution of agreements so that all parties involved know the result instantly. One further thing they can do is automate a workflow such that it only moves on to the next step when certain conditions are satisfied.

Coded on a blockchain, smart contracts operate by following basic “if/when…then…” phrases. When specific requirements are satisfied and confirmed, a network of computers will carry out the tasks.

Some examples of such tasks include distributing funds as specified, registering a car, sending alerts, or even issuing a ticket. The completion of the transaction triggers an update to the blockchain. So, the transaction is final and only authorized parties can view the outcome.

A smart contract can have as many conditions as are necessary to guarantee a satisfactory outcome for all parties involved. Participants must settle on the blockchain representation of transactions and associated data, agree on the “if/when…then…” rules that control those transactions, investigate any potential exceptions, and build a dispute resolution structure in order to establish the terms.

The next step is for a developer to code the smart contract. However, more and more companies are turning to web interfaces, templates, and other online tools to make the process easier.

Smart contract advantages

1. Efficacy, precision, and speed

Contracts are swiftly performed once certain conditions are satisfied. There is no need to prepare paperwork or waste time resolving mistakes that typically come from manually filling out documentation when using smart contracts because they are digital and automated.

2. Honesty and openness

No one can possibly know if someone has tampered with the data for their own gain because there is no intermediary and all parties involved exchange encrypted records of transactions.

3. Safety measures

Thanks to their encryption, blockchain data stores are nearly impossible to compromise. Additionally, hackers would need to modify the entire chain in order to modify a single record on a distributed ledger due to the interconnected nature of each record.

4. Budgeting

By eliminating the middleman and the fees and delays that come with it, smart contracts streamline the financial transaction process.

5. Uses for smart contracts

Learn about the advantages of smart contracts with real-world blockchain applications for businesses.

6. Preserving the effectiveness of treatments

By making the supply chain more transparent, Sonoco and IBM want to lessen the occurrence of problems during the transportation of vital drugs. Pharma Portal, built on IBM Blockchain® Transparent Supply, is a platform that uses blockchain technology to monitor the movement of temperature-controlled medications from point A to point B. This platform provides accurate, trustworthy data to all stakeholders involved in the supply chain.

7. Building more reliable ties between retailers and suppliers

For expedited vendor dispute resolution, the Home Depot employs blockchain-based smart contracts. They are strengthening their connections with suppliers through real-time communication and better insight into the supply chain, which frees up time for vital work and innovation.

8. Improving the speed and efficiency of international trade

Businesses are building a trustworthy ecosystem for international commerce by becoming members of we.trade, IBM Blockchain’s trade finance network. Using established standards and simplified trading alternatives, we.trade, a blockchain-based platform, streamlines the trading process, increases trade opportunities for participating institutions and corporations, and reduces hassle and risk.

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What is a Smart Contract and How It Works?

How do smart contracts work?

Smart contract advantages

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