A smart contract is a piece of computer software that is designed as an automated self-enforcing contract, which means it triggers certain action after predetermined conditions are met. Smart contracts can be used, for instance, as digital agreements that intermediate the exchange of cryptocurrencies (or any other digital asset) between two parties. Once the terms of the agreement have been set, the smart contract verifies their fulfillment and the assets are distributed in accordance.
In other words, smart contracts are basically lines of code that execute a specific function once certain conditions are met. The code usually follows “if… then…” statements that trigger predetermined and predictable actions.
For example, an online shop may implement a smart contract that ensures that “if payment is received, then products are delivered” – which would make the whole process more efficient and less prone to human error.
Although smart contracts became popular in the context of blockchain and cryptocurrencies, the concept was first described by American cryptographer Nick Szabo in 1994, many years before the creation of Bitcoin.
Smart contracts play an important role in the blockchain space and cryptocurrency markets, particularly in regards to ERC-20 tokens, which represent a class of tokens created on the Ethereum network that follow the ERC-20 standard. These tokens are often distributed through Initial Coin Offering (ICO) events, and the use of smart contracts enables a trustless and cost-effective exchange of funds during the sales. Their use can also facilitate payment processing for decentralized applications (DApps) or decentralized exchanges (DEX).
Another area in which smart contracts are suitable is the financial services industry. For instance, the technology may be used to automate the clearing and settlement of trades, the payment of bond coupons, or even the calculation and payout of insurance claims.
Despite their obvious applications in finance, smart contracts are versatile enough to apply to practically any industry in which funds, digital assets, or any kind of digital information need to be transferred between parties. The equipment leasing industry, for instance, has made extensive real-world use of these contracts to make lease agreements more efficient.
In the healthcare sector, the technology is being explored as a countermeasure against data manipulation in clinical trials. Smart contracts can even be used to enforce intellectual property agreements by establishing a definitive record of shared ownership rights and allocating all royalties and earnings from pieces of intellectual property accordingly.