Smart Contract

What is a Smart Contract?

A smart contract is basically a self-executing contract (software/coded program/algorithm) containing certain terms and conditions of an agreement between two parties written directly into lines of code. This code contains a set of rules under which the parties of that smart contract agree to interact with each other. If and when the predetermined rules are met, the agreement is automatically enforced, i.e. the smart contract is executed.

Okay, let’s simplify this further:

We may define a smart contract as an application or program that runs on blockchain. It is like a digital agreement, which has a set of rules defined in it. You may take an example of a Lease and License Agreement for renting a house. The agreement has certain conditions written in it, according to which both the dealing parties need to act, i.e. they need to fulfill the conditions written in the agreement for a deal to take place. Similar is the case of smart contracts. The ‘smart contract’ is an ‘agreement’, which has a ‘set of rules’ just like ‘conditions’ in the agreement. Once those ‘conditions’ are fulfilled, the agreement is finalized; similarly, once the ‘set of rules’ (also known as predefined rules) are met, the contract is executed without any intermediary’s involvement or time loss, and the participants can be immediately certain of the outcome.

But, there are notable differences between both – physical agreements and smart contracts:

Agreements	Smart Contracts
Agreements are made on a physical medium (paper).	Smart contracts are deployed on digital mediums (blockchains).
Agreements need an intermediary (a middleman, lawyer) to go through the process.	Smart contracts do not need an intermediary (a middleman/ third party). They get automatically executed as soon as the conditions/rules are met.
Agreements need a superior authority (a court) to finalize them.	Smart contracts do not need one, as they run on blockchains that are decentralized. This means, you yourself are the sole executor and commander of the transactions, and once you have reached the eligibility criteria of the smart contract, your transaction will automatically take place without the meddling of any third party/higher authority. No one will be able to stop your transaction from happening.
You need to ‘wait’ for your agreement to be approved by the court, i.e. there is a time factor involved.	You do not need to wait for the outcome of your smart contract as it is automated, i.e. there is no time loss.

Conclusion:

We may say that Smart Contracts are simply programs (algorithms) stored on a blockchain that run (execute the task) when predetermined conditions are met.