What Is a Smart Contract?
Smart contracts are computer protocols that ensure compliance with the terms of the contract by both parties and trigger its execution. These actions are set up by the developer of a smart contract and form certain operating procedures. That is why smart contracts got their name: it is impossible to launch and conduct an operation evading established rules.
Nick Szabo, the creator of BitGold, a Bitcoin prototype, also conceived the use and implementation of smart contracts. Satoshi Nakamoto included some basic principles of smart contracts in the Bitcoin protocol. However, their full implementation was possible after the Ethereum Virtual Machine (EVM) was created.
Initially, the Solidity programming language was used to write smart contracts. Later, some others languages appeared (for example, Simplicity).
How does it work?
The participants of the Ethereum platform who intend to perform a transaction deploy a certain smart contract. It describes the algorithm of actions that are to be taken by both parties. The sum that will be transferred upon execution is defined too.
How the smart contract works in real estate in comparison with the traditional contract
After the smart contract is deployed, the parties perform all prescribed actions and automatically receive what they are supposed to under the agreement. If the terms of the smart contract are not met, the funds are returned to their owner.
The absence of intermediaries between a sender and a recipient. The only intermediary is the smart contract itself, and it is impossible to alter it.
Automatic execution of a given algorithm.
Irreversibility of transactions.
The main advantages of smart contracts are cost-effectiveness, security, and no option for falsification. The parties that do not trust each other can use smart contracts to ensure the reliability of the signed deal. Moreover, operating expenses are reduced significantly, since users do not have to pay intermediaries for the services they provide, to convert currencies and to legally formalize the deal.
Smart contracts also have disadvantages, such as possible critical vulnerabilities in the code of the program, the impossibility of eliminating errors after launching. Besides, the lack of legal regulation of agreements can be regarded as a drawback, however, this issue can be resolved by a preliminary audit of the contract.