In the easiest form, it is an agreement between couple of multiple parties online that can be automatically executed on a transparent blockchain using cryptocurrency.
In the context of blockchains and cryptocurrencies, smart contracts are:
– pre-written logic (computer code),
– stored and replicated on a distributed storage platform (eg a blockchain),
– executed/run by a network of computers (usually the same ones running the blockchain),
– and can result in ledger updates (cryptocurrency payments, etc).
Smart contracts help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a third party. Antony Lewis from Bitsonblocks.net has simply put Smart Contracts as little programs that execute “if this happens then do that”, run and verified by many computers to ensure trustworthiness.
Smart contract is the building block of ethereum. A Smart Contract does perform the action that it is designed for; however, to “run” a Smart Contract (currently on an Ethereum blockchain), you need to “fuel” it. The basis of fueling a Smart Contract is like hiring the services of the network for it to actually execute its command. According to a snippet from Antony Lewis who draws this marvellous example: “Just like you put money into a vending machine to make it vend, with public blockchains you need to pay to run the contract. With a blockchain such as Ethereum, you initiate a smart contract by paying it ETH (Ether, Ethereum’s native cryptocurrency) – this is the digital equivalent of putting money into a vending machine.”
How are electronic agreements executed?
There are various ways in which electronic agreements are executed. The simplest form of electronic agreement being executed is the End User License Agreement of a software or service, where the user (through his unique id) “accepts” the agreement. More complex electronic contracts will use “digital signature” to mirror the wet signature and hard copy contracts.