“Smart Contract” is a contract that relies on Blockchain technology.A Smart Contract, as described by Vitalik Buterin, is “a program that directly controls digital assets”. For the record, Vitalik Buterin is the senior developer who imagined Ethereum, sometimes called Bitcoin 2.0.
Nick Szabo is the inventor of Smart Contracts in 1994. Rumor says that he could be the person who invented Bitcoin.
Whereas a traditional legal contract defines the rules of an agreement between several parties, a Smart Contract goes further and freezes these rules in a Blockchain while ensuring the transfer of an asset – whatever it is – when the conditions contractual agreements are verified.
How to use a smart contract
Each contract has its address in the blockchain. Once a contract is broadcast in the network, you can interact with it by finding it with its address.
For example, you could do “I want 5 € of Ethereum to leave my wallet as soon as the person I’m dealing with is doing the thing X”
Let’s call this person Paul, and Paul will wash your car.
You do not have to be at his side to watch him wet the sponges and use the jet of water. Paul applies and finishes the job in one hour. Now Paul wants to get paid.
He goes on the Ethereum network, puts his address and finds your contract. Now he submits all of the information that proves that he has washed the car.
If the intelligent contract is satisfied with the evidence provided, then the agreed sum goes to Paul’s wallet.
The benefits of smart contracts
This interdependence ensures a solid network, and therefore a high security of financial operations. An intelligent contract can not therefore be altered, destroyed or contested. The smart contract is simply inviolable and tamper-proof.
In addition, the execution of smart contracts is not linked to subjective interpretations. Everything is computerized, and only the code decides on the total or partial execution of the contract. This ensures greater security than the traditional application of the law on contracts.
Lastly, smart contracts can significantly reduce the transaction costs associated with contracting, since the system is decentralized and does not depend on any third party authority.