How Do Smart Contracts Work?

If you’re even slightly interested in the world of blockchain, you may have heard or read about the phrase “smart contract”. But apart from being the digital cousin of a drafted paper contract, how exactly do they work?

It cuts out the middle man

At the core, smart contracts are pieces of code deployed on the blockchain which execute certain instructions once a series of conditions are triggered. A simple analogy would be to think of them as vending machines which dispense funds or other assets to intended parties. In addition, certain rules and conditions can be coded in to ensure that funds are only released once these are met.

Unlike paper contracts, smart contracts don’t need to be witnessed by a lawyer or notary as nodes on the blockchain will verify the potential transaction instead. Furthermore, unlike the hassle of following up and chasing for payments in the offline world, smart contracts ensures automatic execution once this set of conditions are triggered as per the code. The public ledger allows for transparency and accountability, with outside parties able to observe the market activity, but also maintains the anonymity of the parties involved.

For example, smart contracts can assure investors in crowdfunding projects that the founders are actually making progress and using funds to accelerate development. If milestones cannot be met, the funds will be returned to investors.

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https://media.everus.org/2018/03/13/how-do-smart-contracts-work/