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What is a smart contract and how does it work?

10 August, 2022 Blockchain

Thanks to the support of Blockchain technology, smart contracts helps improve and make the process of many common activities automatic, such as agreement and contract enforcement. So what is a smart contract? Everything you need to know about this kind of contract will be provided in the article below!

I. What is a Smart Contract?

First of all, let’s figure out what is a Smart Contract. 

1.1. Definition

Smart Contract was first known in 1993 by Nick Szabo. It composes of many programs running on Blockchain and it also sticks to a specific set of rules. The machine code predefine these rules, which all nodes in the network must follow.

Basically, Smart Contract is a piece of code that runs on the Blockchain platform, creating a protocol that does not need to be delegated. This means:

  • When transacting on Blockchain, two parties just need to make a commitment on the Blockchain platform without having to verify their identity or trust in each other.
  • It ensures that if the transaction does not meet necessary conditions, the contract can not be executed.
  • The use of this kind of new contract eliminates the need of the 3rd party as an intermediary in the transaction. This not only helps reduce operating costs but also makes contracts more transparent.

Each Blockchain will have many different types of Smart Contracts, such as: ink! Of Polkadot,  WASM of Cosmos,… The most prominent is the Ethereum Virtual Machine – Ethereum’s Smart Contract.

1.2. Elements required

To create a Smart Contract, you need to have the following requirements:

Subject: It must have the access to the products/services listed in the contract so that it can be able to automatically lock or unlock them.

Digital Signature: All parties involved in a this Contract must agree to implement the agreement using their private keys (electronic signatures).

Contract terms: The terms in this Contract take the form of a series of activities. And all parties to the contract must sign to accept it.

Decentralized platform: The completed Smart Contract will be uploaded to the Blockchain of the respective decentralized platform and distributed to the nodes of that platform.

II. Differences between Smart and Traditional Contracts

Legal professional are in charge of drafting traditional contracts. They will compile, gather a lot of documents. Moreover, the process requires the help of a third party to execute. This is very time consuming, inefficient and lacks transparency. If there is any problem with the contract, the judicial system will resolve it, which will lead to a high-cost of implementation.

what-is-a-smart-contract-binance
Differences between Smart and Traditional Contracts

In contrast to the traditional contract, Smart contract is created from a computer system with programming languages ​​such as C ++, Java, Go, Python,… It offers the same terms and penalty as a traditional contract. As this kind of contract does not involve human intervention, they can implement the most fair and transparent laws. The blockchain distributed ledger will execute all the code that sets up the Smart Contract .

III. How does a Smart Contract work?

what-is-a-smart-contract-audit
The way Smart Contracts work (cre: masterthecrypto)

1 – Pre-program the contract: Smart Contracts are only automatically executed when the terms are pre-programmed. All counterparties will establish the terms, rules and conditions of the agreement and translate them into Code as a programming language.

2 – Chain of Events: If it meet the required condition, the Contract will be executed

3 – Execution & Value Transfer: When the transfer is made, the contract terms are automatically codified and transferred to the parties involved

4 – Settle: After the blockchain update the completed transaction, you can no longer change it. Only authorized parties can view the results.

Because the system works based on the “If – Then” statement and hundreds of supervisors, there will be no errors in the delivery process.

IV. Benefits of a Smart Contract

Automation: Smart Contract acts as a program that performs various types of tasks on its own. If you do not activate the smart contract, it will stay in the “Inactive” state and take no action.

Distributed: The Ethereum network will copy and distribute Smart contracts in all nodes instead of centralized servers.

Non-modifiable: Once deployed, you can not modify the contract. You can only delete it if you add this function before implementation stage. Besides, the contract only implements the terms stated in the contract. This helps prevent contract tampering.

Customizable: Prior to deployment, the choice of encryption will help the contract create a variety of decentralized applications.

No need to rely on trust: Two strangers can execute the Smart contracts without meeting in person. Blockchain technology will ensure the safety and accuracy of contract data.

Transparent: Although anyone can view and download it, they can not change the source code as the Contract is based on the public Blockchain

Accuracy: Limit common errors when drafting on paper.

Saving: These Contracts uses a programming language on the computer so it help saves a lot of time. In addition, it also saves costs on other intermediary stages.

The above is information related to the term “Smart Contract” that has been having a great impact in today’s world. As we can see, it serves as a perfect replacement for intermediaries in traditional models. Through these contracts, you can automatically and securely execute your transactions.

V. Top-quality Smart Contract Development Service

If you are looking for the best Smart Contract services you need to help you successfully meet your project planning goals and deadline, you are in the right place! Pando Infinity is a leading company in the software development industry in Vietnam. We specialize in blockchain development resources which includes:

  • Smart Contracts Development: We provide the most accurately coded smart contract conditions to you. Our solution ensures that your Blockchain adheres to the right automation
  • Audit Smart Contract: We provide smart contract validation services for various industries. Our end-to-end solution makes sure that smart contracts are not susceptible to attacks and hacks.

During many years in the technology industry, we have become a trusted subcontractor with more than 65 enterprises and startups all over the world like HongKong, Taiwan, Japan, VietNam, US, Australia… Contact our experts to figure out what values we can bring to you and your business.

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