The word “contract” usually theorizes for a sort of code of conduct. In other words, contracts enforce some form of governance or rule. But what if these dogmas are smart to be automatically executed? Welcome to the Blockchain era, brought to you by Vitalik Buterin.
Smart contracts, in the words of Vitalik Buterin (Source: TechCrunch)
If you didn’t understand the obviously-genius guy on the video, you were probably distracted by his T-shirt. What “Sheldon Cooper” (Vitalik Buterin) is trying to say is: a Smart contract is a code stored in the Blockchain network. It defines the conditions agreed upon to reach a consensus. So if the required conditions are met, certain actions are executed. In other words, when -instead of simple data-, a block contains a set of instructions to be executed under specific circumstances, we talk about Smart Contracts. In this way when a certain Blockchain transaction takes place, some set of actions are triggered.
Let’s explore an example to clarify things more.
Think of it as being the owner of, say, a photograph you took. You may want to use the blockchain to sell your photo to buyers. Since the blockchain already confirms you as the rightful owner, let’s look at a Smart contract to sell a copy. We’ll use the blockchain as the platform for the entire transaction.
First, you’re established as owning the copyright. Then a buyer submits payment for a copy of the photo. Once you receive payment and it is confirmed, a Smart contract executes and then delivers a copy of the photo to the buyer. The transaction is recorded in the blockchain and each step is stored forever as proof of what has happened. In this example, the Smart contract was code that ensured that all the conditions were met for this purchase and even delivered the photo through some form of online transfer.
Smart contracts translate the promising potential of the Blockchain space. It enables increasingly complex transactions to take place in the Blockchain while enforcing them. We can visualize this in our real world as financial transactions, real estate or legal agreements, even agreements between machines like self-driving cars negotiating around each other in traffic. It’s easy to see that a smart contract takes the capabilities of the Blockchain up a few notches and makes it a platform for complex action.