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What are smart contracts? How do they work?

Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the next action when conditions are met. The most popular blockchain platform to run a smart contract is Ethereum.

How do smart contracts work?

Think smart contracts as digital “if-then” statements between two (or more) parties. If one group’s needs are met, then the agreement can be honored, and the contract is considered complete. 

Let’s say a market asks a farmer for 100 ears of corn. The former will lock funds into a smart contract that can then be approved when the latter delivers. When the farmer delivers their obligation, the funds will immediately be released — i.e., after fulfillment of a legal contract. However, the contract is canceled and funds are reversed to the client if the farmer misses their deadline.

Of course, the above is a small use case. Smart contracts can be programmed to work for the masses, replacing governmental mandates in retail dealings, among other benefits. Moreover, smart contracts would potentially remove the need for bringing certain disagreements into court, saving parties both time and money.


IBM and Cointelegraph