Theory

Smart Contracts

A smart contract is a self-executing program stored on a blockchain that automatically carries out actions based on predefined rules. It eliminates the need for intermediaries by ensuring trust, security, and transparency through a tamper-proof, decentralized ledger. These contracts are written as code and run without human intervention once deployed, making them efficient and reliable for tasks like payments or data sharing.

How Do Smart Contracts Work?

Smart contracts are like digital agreements that run on a blockchain. They follow a clear process to handle tasks like transferring money or verifying deals without a middleman. Here’s how they operate step-by-step:

Step 1: People decide the rules for the smart contract, such as "send money when a task is done."

• This step involves two or more parties agreeing on what should happen. For example, a buyer and seller might decide that payment is released only when a package arrives. These rules form the foundation of the contract.

Step 2: Developers write these rules into a program using a special coding language.

• Languages like Solidity (for Ethereum) are used to turn the agreed rules into computer code. The code tells the blockchain exactly what to do, like checking a delivery status or calculating a payment amount.

Step 3: The program is tested to make sure it works correctly and securely.

• Before it goes live, developers test the code to catch errors or security flaws. For instance, they might simulate a transaction to ensure the money transfers only when conditions are met, protecting all parties involved.

Step 4: Once ready, the smart contract is placed on a blockchain, where it can’t be changed.

• The finished code is uploaded to a blockchain like Ethereum, becoming permanent and public. This ensures no one can alter the rules later, providing trust and immutability.

Step 5: The smart contract waits for a trigger, like a payment or a message from a trusted source called an "oracle."

• An oracle is an external service that feeds real-world data (e.g., a delivery confirmation) to the contract. The contract stays dormant until this trigger happens, ensuring actions occur at the right time.

Step 6: When the conditions are met, the smart contract runs automatically, and the blockchain updates with the result, such as transferring money from one user to another.

• If the delivery arrives, for example, the contract instantly sends payment to the seller without delay. The blockchain records this transaction across all its computers, making it secure and verifiable.

This process ensures that actions happen exactly as planned, with all computers on the blockchain agreeing on the outcome, making it fast, safe, and reliable. Once executed, the results are transparent and permanent, reducing disputes and increasing efficiency.