What is a Smart Contract? – In Simple Terms

Trustless Blockchain-based Software-based Contracts = Smart Contracts

A smart contract is self executing contract where the terms and conditions are defined and enforced using software. Smart contracts are generally stored and secured using blockchain technology.[1][2][3]

To re-phrase, a smart contract (or crypto contract) is a computer program that executes when a set of conditions defined by the creator of the contract are met.

It is smart, because the software is doing something automatically once the conditions are met.

It is “crypto” because a lot of what is happening is based on the principles of cryptography.

The benefit of a smart contract is that technologies like blockchain and cryptography ensure the execution of a peer-to-peer contract without needing to involve lawyers and trust (smart contracts are trustless peer-to-peer contracts).

One could say Bitcoin’s whole system of transactions is composed of blockchain-based smart contracts. In fact, one could essentially say substantially all cryptocurrencies are smart contract-based. However, the term smart contract is often associated with the Ethereum network (since its a software platform focused on hosting smart contracts and decentralized applications on a blockchain).

With the above in mind, smart contracts don’t have to work in isolation, many smart contracts can work in tandem to create a complex system.

The reality is, the potential of smart contracts goes far beyond just facilitating transactions. Smart contracts can really do anything you could imagine a software-based contract doing, including interacting with decentralized applications.

If the contract says “send X tokens to Y wallet on Z date” (or more generally “do X thing on Z date”) then it will be so. If a contract says grab this data, then ping this other contract, then store that data there, then wait 5 days and ping this contract, and then execute this contract, then send this data there… etc… it can do that too. There really isn’t a limit to the software-based things smart contracts can do (although, a programmer must program the contract and on Ethereum you have to pay fees for sending information between contracts; see “gas“).

This is different than a real life contract where the parties who signed the contract (or a third party) have to execute and enforce the contract. Instead, its more like software-based conditional “if…then” commands and it is enforced by code.

Further, a smart contract is more flexible than a real contract, since it can essentially do anything a real contract can do plus anything a computer script can do.

As noted above, smart contract based platforms, like Ethereum, use smart contracts alongside blockchain technology and allow anyone to create a trustless smart contract for any purpose.

One thing commonly done with Etherum’s network is ICOs (specifically the pre-sale of tokens and the distribution of tokens).

Using a smart contract, Ether can be collected and a new token can be distributed to cryptocurrency wallets across the world based on the terms of the contract.

It might feel sketchy to give some company online your Ether in the hope of getting tokens back if it weren’t for some assurance. The smart contract is the assurance.

Like with cryptocurrency transactions, smart contract transactions leverage a technology that replaces the need for trust. Thus, the existence of smart contracts opens countless doors for trustless peer-to-peer contracts that leverages the technology behind Bitcoin and other cryptocurrencies to do much more than just facilitate transactions.

Article Citations
  1. smart contract. techtarget.com.
  2. How Do Ethereum Smart Contracts Work?
  3. What is the difference between smart contracts and dapps? Quora.com.

Author: Thomas DeMichele

Thomas DeMichele has been working in the cryptocurrency information space since 2015 when CryptocurrencyFacts.com was created. He has contributed to MakerDAO, Alpha Bot (the number one crypto bot on Discord),...