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:

1. Farmer John and Block Insurance agree that if the temperature is above 90 degrees for 5 days in a row, his crops will die

2. Farmer John sends Block Insurance 1 Ethereum (ETH) token to insure his crops

3. The 1 ETH is deposited into a smart contract

4. Block Insurance would deposit 10 ETH into the smart contract as collateral in case of a drought

5. The smart contract monitors the temperature

6. If the temperature remains under 90 degrees, nothing happens and Block Insurance keeps Farmer John’s 1 ETH

7. If the temperature goes over 90 degrees for 5 days in a row, the smart contract pays Farmer John 10 ETH

8. 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