A smart contract is a protocol digitally created which is intended to digitally facilitate, verify, or even enforce negotiation – these allow performance of all credible transactions without the involvement of any third parties.
Blockchain has decentralized the system -there is no need to pay money to the middlemen who keep interfering in every transaction. Blockchains might have their own set of problems, but they are undeniably faster, way cheaper and of course more secure than traditional systems.
In 194, a legal scholar and cryptographer, Nick Szabo realized that smart contracts are a better way to decentralize the system. Contracts can be converted to easy computer codes, and then stored and replicated in the system, which can be supervised by a network of computers that can run the blockchain. The result would be transferring money and receiving the product or the service.
These help one to exchange money, property, shares, or anything of value, without any conflict and by avoiding a middleman. An analogy would be a vending machine –when one goes to a lawyer, one pays them, and then waits. With smart contracts, one drops in a bitcoin, (into the ledger) and immediately gets a river’s license or whatever document necessary.
These contracts are capable of defining the rules, penalties and more – they can also automatically enforce these obligations.
Usually a traditional contract is the one still used frequently, that includes the terms and conditions of a partnership or even service agreement. The contract is written in human code, and is always subject to interpretation. It is not without ambiguity; hence people can interpret as they feel.
In all these circumstances, it often needs a third party – making the case full of disputes. Thus the execution of a human contract requires a lot of energy –which makes it time consuming, resource consuming and definitely costly.
Blockchain can be thought of a book in which maintains records –it might be about some transaction, or even may not be so. The idea was to bring certification into play, using secure digital timestamps and not letting it be altered. In blockchain approach, the documents ae linked together to form a chain. With blockchain, any transactions can be encrypted. It even resists from a collision, which happens when there are two different input results in the same output.
So one simply needs to write the smart contract using a programming language, and then the developers add in the logic so that when call to action happens, the script enables the steps.