Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They operate on blockchain technology and automatically execute, enforce, or facilitate the negotiation of a contract when predefined conditions or triggers are met.
Here's how they work:
1. Code Creation: A smart contract is created using programming languages such as Solidity (for Ethereum) or others that are compatible with the blockchain platform.
2. Deployment: The smart contract code is deployed to the blockchain, creating a contract address.
3. Digital Agreement: Parties involved in the contract interact with the smart contract by sending transactions to its address, which may include input data or cryptocurrency.
4. Self-Executing: The contract executes when predefined conditions are met. For example, in a simple escrow smart contract, when both parties fulfill their obligations, the contract releases funds automatically.
5. Immutable and Transparent: Once deployed, smart contracts are immutable, meaning their code cannot be changed. They are also transparent, as all contract actions and transactions are recorded on the blockchain and visible to all parties.
6. Decentralized: Smart contracts run on a decentralized network of computers (nodes) that validate and record transactions. This eliminates the need for intermediaries, reducing costs and the risk of fraud.
7. Trustless: Smart contracts operate in a trustless environment, as the code enforces the contract terms. Trust is placed in the code and blockchain network, not in a central authority.
Smart contracts have a wide range of applications, from financial services like decentralized finance (DeFi) to supply chain management, voting systems, and more. They offer security, efficiency, and transparency in executing agreements, making them a fundamental component of blockchain technology.
