Smart Contracts are like traditional contracts in terms of agreement and obligation of the parties involved. That is where the similarity ends. Smart contracts are self-executing and do not need a third party for verification and execution. Smart contracts are encoded with certain instructions which get executed when their conditions are fulfilled.

For example, you rent a flat from someone through blockchain. You get the receipt, in a virtual contract, of the payment that you made using cryptocurrency. As per the contract, you should get the digital keys by a certain date. If you do not get the digital keys as per the contract, the funds are released back to you by the blockchain. But if the keys are ready to be delivered to you by the set date, then the system releases the keys to you and the funds to the other person in the contract. There is no need for a third party to verify the transaction as it is processed only after the nodes on the blockchain reach a consensus. The consensus mechanism, based on the majority vote, ensures the authenticity of the transaction and gives a go-ahead to update the distributed ledger. The ledger is updated by miners – a category of nodes on the blockchain that we will explore next.

While the contract details are visible to all the nodes on the blockchain, the identity of the parties involved is kept anonymous. Some of the benefits that you can expect from smart contracts are:

Independence

There is no dependence on any intermediaries like a real estate agent in the above example. Once you decide to engage in a transaction, you can create the details of the agreement yourself and initiate it using blockchain.

Security

The encryption algorithm ensures that the contract is secure and tamper-proof. Every node in the blockchain has a copy of the contract reducing the probability of unauthorized alteration.

Efficient and Cost-Effective

There is no time spent in a business process to get the contract ready nor is there any delay caused by paperwork. The cost involved in managing the intermediaries is also removed giving you the cost-benefit.

Smart contracts can be used in any industry as there is no limit to the stipulations that can be included in a contract.