October- 26, 2018 | AtoZ Markets
As the American cryptographer and programmer Nick Szabo back described them in 1996 (long before the blockchain technology appeared), smart contracts are digital protocols for information transfer, for executing a transaction once the established conditions are met and that fully control the process automatically, using mathematical algorithms.
This definition, over ten years, remains accurate today. However, in 1996 this conception could not be realized, as the necessary technologies were not available, in particular the distributed ledger.
In 2008, Bitcoin, the first cryptocurrency appeared, creating the ground for the technology of blockchain, without a decentralized ledger at the time.
Since it only contains information on the transaction itself, the Bitcoin blockchain –which was the base for developing smart contracts- does not allow concluding a transaction to be prescribed in a new block.
After five years later, the Ethereum blockchain platform made it possible to use smart contracts in practice, and while the market today offers many platforms that allow using smart contracts, Ethereum remains one of the most widespread.
How Do Smart Contracts Work?
Smart contracts are computer protocols or, used to enter all the terms of the contract concluded between the parties for the transaction into the blockchain.
The lingual form used in the smart contract is as “if-then”. For example: “if Party A transfers money, then Party B hands over the rights to the apartment”. The contract can include two or more participants as individuals or organizations. Once the given conditions are met, the smart contract automatically executes the transaction and ensures that the agreement is adhered to, while data encryption ensures the anonymity of the parties to the agreement.