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Smart contracts explained

A smart contract ensures the enforcement of the terms of an agreement without a person acting as a mediator. Instead of the traditional text-based contract, the smart contract is a code that runs on blockchain technology.

Nick Szabo, the computer scientist and lawyer who first proposed smart contracts, compared it to a vending machine. The concept is like this:

If you put two dollars in the machine to buy a soda that costs one dollar, then the machine dispenses your soda and gives you back one dollar as a change. If you place less than the price of the soda, then the vending machine will not accept your payment and will not dispense the product.

There was no need for a person or a mediator to facilitate the transaction in both instances. Similarly, smart contracts follow the “if/when…then” principle.

One example is a smart contract between a project developer and investors.

When the smart contract receives the indicated amount of funds from the investors, the smart contract will then release the coins to the developer. If the developer fails to complete the project, the smart contract will return the coins to the investors.

Decentralized applications (dApps) bundle smart contracts together to perform sophisticated transactions such as trading and lending.

Benefits of using smart contracts