What are Smart Contracts?
Note: Data in this section last updated August 26th, 2022
Smart contracts are nothing more than computer programs that automatically execute when agreed-upon conditions are met. For example, let’s say that Farmer John wants to use a smart contract through Block Insurance (a fictitious entity) to insure his crops against a drought:
Farmer John and Block Insurance agree that if the temperature is above 90 degrees for 5 days in a row, his crops will die
Farmer John sends Block Insurance 1 Ethereum (ETH) token to insure his crops
The 1 ETH is deposited into a smart contract
Block Insurance would deposit 10 ETH into the smart contract as collateral in case of a drought
The smart contract monitors the temperature
If the temperature remains under 90 degrees, nothing happens and Block Insurance keeps Farmer John’s 1 ETH
If the temperature goes over 90 degrees for 5 days in a row, the smart contract pays Farmer John 10 ETH
Farmer John can offset his crop loss with the profits from 10 ETH
Smart contracts can be used for virtually any type of transaction including financial deals, trade agreements, real estate transactions, entertainment royalties, etc… They also have many benefits over traditional contracts including the fact that they are:
Instant: Because smart contracts execute instantly, they can save hours of various business processes
Accurate: Using smart contracts reduces human error, such as mistakes that can be made when filling out multiple forms
Cheap: Smart contracts remove the needs for lawyers, bankers and brokers, making them much cheaper
Transparent: Terms and conditions are pre-agreed upon and fully visible to both parties. As such there, is no way to dispute a smart contract after it has been executed
Secure: Information is stored on a decentralized and distributed blockchain, meaning that there is no risk of data loss
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