Smart Contract
Definition
A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network.
Why It Matters
Smart contracts allow for trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. They are automated, transparent, and irreversible.
Contextual Example
A smart contract on the Ethereum blockchain could be created for a vending machine. The contract would hold the items, and if someone sends the correct amount of cryptocurrency to the contract's address, it automatically releases the item to them.
Common Misunderstandings
- Smart contracts are not necessarily "smart" or legally binding contracts in the traditional sense. They are simply programs that run on a blockchain.
- Bugs in a smart contract's code can have serious financial consequences, as they are often irreversible.