A smart contract is a contract that automatically executes, with the terms of the agreement between buyer and seller written directly into computer code. Smart contracts are lines of code that are stored on a blockchain and execute automatically when certain conditions are met. Without the need for a central authority, legal system, or external enforcement mechanism, smart contracts enable trusted transactions and agreements to be executed between dissimilar, anonymous parties. Smart contracts make transactions transparent, irreversible, and auditable. The benefits of smart contracts are most evident in business partnerships, where they are typically used to enforce an agreement so that all parties can be certain of the outcome without the need for an intermediary.
The easiest way to explain what a smart contract does is through an example. If you've ever purchased a vehicle from a dealership, you know that the process involves multiple steps and can be irritating. If you cannot pay for the automobile in full, you will need to obtain financing. This will necessitate a credit check and the completion of multiple forms containing personal information to verify your identity. Throughout the process, you will interact with a variety of individuals, including the salesperson, finance broker, and lender. Various commissions and fees are added to the car's base price to compensate for their labor. Smart contracts on blockchain can streamline this complicated process, which involves multiple intermediaries due to a lack of trust among transaction parties. With your identity stored on a blockchain, credit decisions can be made swiftly. Then, a smart contract would be created between your bank, the dealer, and the lender so that, once the funds have been released to the dealer, the lender will hold the vehicle's title and repayment will commence based on the terms agreed upon. The transfer of ownership would be automatic as the transaction gets recorded to a blockchain, is shared among the participants, and can be checked at any time.