A smart contract is a protocol that runs within a decentralized data network without intermediaries (Blockchain).
Surely many are already familiar with the term “blockchain”, since it is the new technology in which, among other things, all cryptocurrency transactions in the digital world, as well as their holding, are sheltered. This network allows us to interact directly with the peer (without intermediaries) through an unmodifiable transaction record system that validates the transactions and is not in the possession of any authority, but belongs to all users who participate in it. All users have an identical copy of the transaction log, which is unmodifiable unless there is a majority consensus among them, which makes the network not prone to deliberate modifications, and thus reliable and secure. Finally, blockchain networks are programmed with a reward system (issued as digital tokens) for those who participate in it by validating operations. The aim is to have a large number of validators within the network, which generates an even greater decentralization of information.
This introduction to blockchain opens the door to understanding how a smart contract works.
A smart contract is a protocol that normally runs within a blockchain, meaning that this contract works like any other transaction within the network. All users have access to it, which makes the contract validated by decentralized majority consensus, unmodifiable and automatically enforceable. Once validated by the users, the contract is registered in the network and its clauses will be automatically executed when the agreed requirements are met.
Smart contracts solve the dilemma of peer-to-peer contracting in the decentralized world, without anyone intervening. In the conventional digital world, trusted third parties (MeLi, Amazon, Paypal, etc.) are used to conduct peer-to-peer transactions. In contrast, smart contracts are self-executing, there is no need for a third party to execute the contract for the users, nor to guarantee their trust. With this innovation, trust between parties is eliminated and replaced by validation, the blockchain guarantees that the contract will be executed according to its pre-programmed clauses, it is not necessary to trust that the other party will comply.
However, there may be a smart contract between parties which is subject to a specific event in the physical world that the blockchain does not know. This is why there are oracles, external agents that provide data verified by the majority consensus about what happens in the real world (e.g., weather data for insurance companies, the price of the dollar, etc.).
Smart contracts offer more transactional security than any traditional contract, they are self-verifying and self-executing. They involve less bureaucracy, are transparent, do not require intermediaries and are therefore less costly and more secure. Many intermediaries may no longer be necessary in banking, insurance, energy, health, government, music, etc. Already today, tenders, international money transactions, credential verifications and other activities are carried out using smart contract technology