Smart contracts represent one of the most significant innovations brought about by blockchain technology. They are essentially self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code.

Understanding Smart Contracts

To begin, it is helpful to define smart contracts in more formal terms.

They run on a blockchain network, where they are stored, replicated, and executed without oversight or intervention from a central authority. When predefined conditions are met, smart contracts automatically carry out the encoded actions, which may include transferring funds, issuing tokens, or recording data.

Conceptually, smart contracts follow a straightforward "if/when… then…" logic written into code on the blockchain. For example, a smart contract for a wager might specify: if Team A wins the game, pay Alice 10 ETH; otherwise, pay Bob 10 ETH. When the game's outcome is known, the contract automatically performs the appropriate transaction.

Smart Contract Benefits

• Transparency: all steps are recorded on the blockchain, accessible to authorized parties;
• Efficiency: automates manual tasks, reducing transaction time and paperwork;
• Security: funds held securely in escrow until conditions are met, minimizing fraud risk;
• Trust: eliminates the need for intermediaries, reducing potential disputes.

Smart Contract for Selling a House

To better understand how smart contracts function, consider the example of using one to facilitate the sale of a house.

Contract participants

• Seller: owns the house and sets the terms;
• Buyer: offers to purchase the house based on the terms;
• Escrow: holds the buyer's funds securely;
• Title registry: holds and updates the official ownership record.

Contract terms

• Purchase price: agreed-upon value of the house;
• Contingencies: conditions to be met before sale finalizes (e.g., inspections, approvals);
• Deadlines: timeframes for each action;
• Transfer of ownership: triggered upon fulfilling all conditions.

The process of selling a house through a smart contract begins with the seller creating the contract and defining the terms, including the sale price and an escrow mechanism. The buyer then deposits the agreed purchase amount into the escrow, and the smart contract automatically checks that the deposit matches the required amount.

Both parties then complete any agreed-upon conditions, such as property inspections. Once all conditions are met, the smart contract carries out a secure transfer of funds from the escrow to the seller and updates the property title to reflect the new owner, finalizing the sale. The entire transaction is recorded on the blockchain, ensuring transparency and security.

The illustration below clarifies this process:

Blockchains Supporting Smart Contracts

Despite being available in Bitcoin, smart contracts there are rather limited compared to other platforms due to Bitcoin's scripting language, which is designed for simplicity and security over flexibility. The first blockchain to offer full support for complex smart contracts is Ethereum (ETH), using Solidity and Vyper as its primary programming languages. Moreover, Ethereum has become the leading platform for decentralized applications (dApps), with a large and active development community.