Introduction to Smart contract
It's a collection of code (its functions) and data (its state)
What is a smart contract?
A "smart contract" is simply a program that runs on the Ethereum blockchain. It's a collection of code (its functions) and data (its state) that resides at a specific address on the Ethereum blockchain.
Smart contracts are a type of Ethereum account. This means they have a balance and can be the target of transactions. However they're not controlled by a user, instead they are deployed to the network and run as programmed. User accounts can then interact with a smart contract by submitting transactions that execute a function defined on the smart contract. Smart contracts can define rules, like a regular contract, and automatically enforce them via the code. Smart contracts cannot be deleted by default, and interactions with them are irreversible
What are contracts?
You're probably thinking: "I'm not a lawyer! Why would I care about contracts?". For most people, contracts bring to mind needlessly long terms and conditions agreements or boring legal documents.
Contracts are just agreements. That is, any form of agreement can be encapsulated within the conditions of a contract. Verbal agreements or pen-and-paper contracts are acceptable for many things, but they aren't without flaws.
Trust and contracts
One of the biggest problems with a traditional contract is the need for trusted individuals to follow through with the contract's outcomes.
Here is an example:
Alice and Bob are having a bicycle race. Let's say Alice bets Bob $10 that she will win the race. Bob is confident he'll be the winner and agrees to the bet. In the end, Alice finishes the race well ahead of Bob and is the clear winner. But Bob refuses to pay out on the bet, claiming Alice must have cheated.
This silly example illustrates the problem with any non-smart agreement. Even if the conditions of the agreement get met (i.e. you are the winner of the race), you must still trust another person to fulfill the agreement (i.e. payout on the bet).
Smart contracts
Smart contracts digitize agreements by turning the terms of an agreement into computer code that automatically executes when the contract terms are met.
A digital vending machine
A simple metaphor for a smart contract is a vending machine, which works somewhat similarly to a smart contract - specific inputs guarantee predetermined outputs.
You select a product
The vending machine returns the amount required to purchase the product
You insert the correct amount
The vending machine verifies you have inserted the correct amount
The vending machine dispenses the product of choice
The vending machine will only dispense your desired product after all requirements are met. If you don't select a product or insert enough money, the vending machine won't give out your product.
Automatic execution
One of the most significant benefits smart contracts have over regular contracts is that the outcome is automatically executed when the contract conditions are realized. There is no need to wait for a human to execute the result. In other words: smart contracts remove the need for trust.
For example, you could write a smart contract that holds funds in escrow for a child, allowing them to withdraw funds after a specific date. If they try to withdraw the funds before the specified date, the smart contract won't execute. Or, you could write a contract that automatically gives you a digital version of a car's title when you pay the dealer.
Predictable outcomes
The human factor is one of the biggest points of failure with traditional contracts. For example, two individual judges may interpret a traditional contract in different ways. Their interpretations could lead to different decisions getting made and disparate outcomes. Smart contracts remove the possibility of different interpretations. Instead, smart contracts execute precisely based on the conditions written within the contract's code. This precision means that given the same circumstances, the smart contract will produce the same result.
Public record
Smart contracts are also useful for audits and tracking. Since Ethereum smart contracts are on a public blockchain, anyone can instantly track asset transfers and other related information. You can check to see that someone sent money to your address, for example.
Privacy protection
Smart contracts can also protect your privacy. Since Ethereum is a pseudonymous network (your transactions are tied publicly to a unique cryptographic address, not your identity), you can protect your privacy from observers.
Visible terms
Finally, like contracts, you can check what's in a smart contract before you sign it (or otherwise interact with it). Better yet, public transparency of the terms in the contract means that anyone can scrutinize it.
Benefits of smart contracts
Speed, efficiency and accuracy Once a condition is met, the contract is executed immediately. Because smart contracts are digital and automated, there’s no paperwork to process and no time spent reconciling errors that often result from manually filling in documents.
Trust and transparency Because there’s no third party involved, and because encrypted records of transactions are shared across participants, there’s no need to question whether information has been altered for personal benefit.
Security Blockchain transaction records are encrypted, which makes them very hard to hack. Moreover, because each record is connected to the previous and subsequent records on a distributed ledger, hackers would have to alter the entire chain to change a single record.
Savings Smart contracts remove the need for intermediaries to handle transactions and, by extension, their associated time delays and fees.
