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There is so much buzz on the internet as regards smart contracts and blockchain, however, not everyone touting this technology really understands what it is and how it works. As someone who has deeply analyzed the theory behind blockchain applications, I can safely walk you through the ultimate guide to blockchain contracts.
Smart contract is a term which describes a code which can facilitate, execute and enforce the negotiation or operation of an agreement using blockchain. This is an entirely automated process and can complement or totally eliminate the need for legal written contracts. A blockchain is termed a decentralized distributed ledger likened to a network of individuals who have a similar copy of the same documents. Changes can be made to these documents with each party receiving an update.
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Simple right? The documents in question contains a list accounts and balances. Individuals own these accounts and documents and can send their own bitcoins to other accounts. Smart contracts are basically instructions which govern these transactions. The idea, according to Nick Szabo in 1993, is to create a digital vending machine; to eliminate the need for a middle man in any business transaction.
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There are three concepts to understanding how smart contracts work, the coding, distributed ledgers and the execution.
The Coding. This is what goes into the contract. They work like computer programs, hence it is very important that they execute what is required of them. This is achieved by putting in the needed logic when writing the code. The code executes predefined instructions which are not prone to the logistics of human languages.
Distributed Ledgers. This is how the smart contract is sent out. The written code is encrypted and sent out to over computers through a distributed network of ledgers. If it is done through public blockchain which doesn’t require permission such as bitcoin, it is sent out the same way a bitcoin transaction will occur.
Execution. This is how this code is processed. Once the code is received, they come to an agreement on the results of the code execution. The network updates the distributed ledgers to record the execution of the contract.
Also Read: Technical Different Between Ethereum, Smart Contract and Bitcoin
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