Generally, smart contracts are computer programs that execute a set of rules for all the transactions on blockchain platform. They are designed to replace the third-party intermediator in a transaction as these parties may be untrustworthy.
However, it needs to be noticed that although smart contracts are called contracts, they usually don't have any legal binding. Only a certain type of smart contracts called smart legal contract is legally binding.
The idea of smart contract was brought up by Nick Szabo in 1998. The word, "smart", is relative. Compared to paper contracts, the smart contract can execute by itself, but compared to artificial intelligence, it is far less smarter.
As described before, smart contracts are computer programs. They are usually written in Solidity and run on Ethereum, the most popular blockchain for running smart contracts. The way it works is if-else statement, i.e. if event X happens, execute Y.(Refer to previous chapter on programming basics.) The task that smart contracts carry out can include transfering money from one account to another, releasing funds, sending notification, etc.
| Benefit | Why? |
| Trustworthiness | Smart contracts remove the need for a third-party, where deliberate sabotage of transaction data can happen |
| Transparency | Smart contracts make all the transaction data visible to every user on the blockchain |
| Efficiency | Smart contracts are automated programs, so they increase the speed of transactions |
| Security | Smart contracts, as part of blockchain, inherit the benefit of security through the use of the public ledger |