Smart contracts refer to programs stored on a blockchain that operate when certain requirements are met and established. They are self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. It eliminates the need for a middleman which potentially saves money and time on transactions. Smart contracts render transactions traceable, transparent, and irreversible.
Nick Szabo developed the idea to record contracts in the form of computer code in 1994. He also wrote a book titled; “Smart Contracts: Building Blocks for Digital Free Markets” in which Szabo foreshadows the concept of blockchain decades before it takes off. To further demonstrate his concept, Szabo goes on to found a virtual currency called “Bit Gold” in 1998. Szabo defined smart contracts as computerized transaction protocols that execute the terms of a contract. He wanted to extend the functionality of electronic transaction methods, such as POS (point of sale), to the digital sphere. Years later, Bitcoin (a cryptocurrency) was created in 2008 by a pseudonymous person named Satoshi Nakamoto.
In 2009, the implementation of Bitcoin brought about the mainstream use of blockchain technology. In 2015, Ethereum was created by Vitalik Buterin, and it introduced the first working smart contracts.
How Smart Contracts Work
Simple “if/when…then…” statements are written into code on a blockchain to make smart contracts work. The blockchain is then updated when the transaction is completed. That means the transaction cannot be changed, and no third parties are involved. Then the smart contract can be programmed by a developer. Smart contracts are currently being used for financial services, healthcare, logistics, insurance, credit authorization, legal processes, and even crowdfunding agreements (ICOs).