Smart contracts refer to self-executing programs that run on the Ethereum blockchain, enabling developers to set specific triggers or conditions in the contract which must be met before the contract is executed.

What is the purpose of a smart contract?

Smart contracts are such that an enforceable agreement between buyer and seller is written into the code lines, which is then recorded into the decentralized ledger distributed across the Ethereum blockchain network, becoming immutable and transparent to both parties. They enable transactions/agreements to be carried out anonymously without the interference of a third party such as banks, the court, or government entities as with a traditional contract.

A famous analogy used to explain smart contracts is a vending machine. As opposed to purchasing the products from a merchant or retailer, a condition is set for the goods to be dispensed. Provide the cash, the program runs and validates a condition has been met before executing the contract. This way, both buyers and sellers need not interact and remain anonymous.

An ATM also operates on nearly the same principles. The program verifies certain conditions, such as the funds in the account and the transaction pin. The contract is then executed to release the requested funds once all the conditions are met.

Ethereum quickly became a successful and popular blockchain due to its robustness with smart contracts as well as its capability to support decentralized applications (dApps). The possibility of a wide variety of smart contract applications across business industries is still being explored; however, if Bitcoin is considered the future of monetary transactions, blockchain-based smart contracts are the digital revolution of contractual agreements.