If we go through the basic definition, A smart contract is a tamper-proof program that runs on a blockchain network when certain predefined conditions are satisfied. Smart contracts are computer programs that are hosted and executed on a blockchain network. Each smart contract consists of code specifying predetermined conditions that, when met, trigger outcomes. By running on a decentralized blockchain instead of a centralized server, smart contracts allow multiple parties to come to a shared result in an accurate, timely, and tamper-proof manner.

How it works?

Smart contracts are tamper-proof programs on blockchains with the following logic: “if/when x event happens, then execute y action.” One smart contract can have multiple different conditions and one application can have multiple different smart contracts to support an interconnected set of processes. There are also multiple smart contract languages for programming, with Ethereum’s Solidity being the most popular. ‍ Any developer can create a smart contract and deploy it on a public blockchain for their own purposes, e.g., a personal yield aggregator that automatically shifts their funds to the highest-earning application. However, many smart contracts involve multiple independent parties that may or may not know one another and don’t necessarily trust one another. The smart contract defines exactly how users can interact with it, involving who can interact with the smart contract, at what times, and what inputs result in what outputs. The result is multi-party digital agreements that evolve from today’s probabilistic state, where they will probably execute as desired, to a new deterministic state where they are guaranteed to execute according to their code.

Why Smart Contracts?

Security – Running the contract on decentralized blockchain infrastructure ensures there is no central point of failure to attack, no centralized intermediary to bribe, and no mechanism for either party or a central admin to use to tamper with the outcome.

Reliability – Having the contract logic redundantly processed and verified by a decentralized network of nodes provides strong tamper-proof, uptime, and correctness guarantees that the contract will execute on time according to its terms.

Equitable – Using a decentralized network to host and enforce the terms of the agreement reduces the ability of a for-profit middleman to use their position of privilege to rent-seek and siphon off value.

Efficiency – Automating the backend processes of the agreement—escrow, maintenance, execution, and/or settlement—means neither party has to wait for manual data to be entered, the counterparty to fulfill their obligations, or a middleman to process the transaction.