Smart contracts are digital contracts that are recorded on a blockchain and are executed automatically when preset terms and conditions are satisfied. They are generally used to automate the execution of an agreement so that all participants are completely assured of the outcome, without the participation of an intermediary or the waste of time. They can also automate a workflow, initiating the next step when certain conditions are met.
A smart contract is a self-executing contract in which the conditions of the buyer-seller agreement are directly put into lines of code. The code and the agreements contained within it are dispersed and decentralized over a blockchain network. Transactions are trackable and irreversible, and the code controls the execution.
Smart contracts work by following simple “if/when…then…” statements that are written into code on a blockchain. A network of computers executes the actions when predetermined conditions have been met and verified. These actions could include releasing funds to the appropriate parties, registering a vehicle, sending notifications, or issuing a ticket. The blockchain is then updated when the transaction is completed. That means the transaction cannot be changed, and only parties who have been granted permission can see the results.