Hello there! Have you been hearing the term "smart contracts" lately?? I bet you've been wondering 'what on earth does it mean'.... Smart contracts is an hot word in the crypto space right now. But what does it truly mean? Why can't i stay in a development site for five minutes without coming across this word!
What if your Interviewer asks you to explain Smart Contract to her in simple English words? What if you are developing something related to blockchain and your 5 year old cousin really comes up to you and asks you what is smart contract?
… Now you are thinking right? Simple but difficult. Why? Because you are being asked by a kid… It's more challenging to explain something to an adult than to a kid so i understand your confusion and that's why i am here to help.
Before you understand the term 'smart contract' you really have to understand the meaning of blockchain. I am going to give a basic but detailed explanation for that, which i believe will pave the way for a better understanding of what smart contract is.
What is Blockchain? Blockchain technology is based on four main characteristics:
Decentralization This means that data is not saved on a single computer/server in an only place. On the contrary, most blockchains are saved on millions of computers simultaneously. Because of that, the blockchain cannot be changed. Once a transaction is confirmed on the blockchain it is nearly impossible to change the saved information. Now let's break it down. Imagine Sumay, lends out $5 to several other kids. Let's call them Aila, Dave, Kory, Patterson and Dede.. In other for Sumay to keep a proper record she takes inventory of every transaction on a notebook and asks that all her debtors do the same. With this, there are now 6 notebooks all linked to a transaction with Sumay. This is what we call Decentralization.
Immutability Still on the Sumay's story above. Now that Aila, Dave, Kory, Patterson and Dede all have a copy of every transaction with Sumay the transactions cannot be changed or altered. Because every time a transaction is made with Sumay they all write it down and no person controls the overall representation of the transaction. This is called Immutability.
Consensus Once a transaction is confirmed on the blockchain it is nearly impossible to change the saved information. (To change it, all nodes/computers where the blockchain is kept, would have to be replaced simultaneously.) The underlying principle is called consensus, meaning that the community has to agree on what happens and what does not happen. So any of Sumay's debtors can't change anything on their book because Sumay has a copy already. For a debt profile to be changed there has to be an agreement between Sumay and the other party…
Transparency Another important characteristic of a blockchain is transparency. Since Sumay and all her debtors keep records of every transaction happening between them, we can say the process is very transparent for everyone to see. This is a key feature of blockchain technology and decentralized applications.
Now move to smart contract! A smart contract is not as complicated as it may sound. It is an agreement between two people which is not viewed and controlled by an intermediary, only the system. That means if a party breaches that contract, the blockchain automatically executes the arrangements (which were agreed before) or enforces any other obligation which has been added to the contract. Smart Contracts help you exchange anything of value in a transparent, conflict-free ecosystem that is based on Blockchain. Now let's go the kids way….. Suppose there’s a person ‘Joe’ who wishes to sell his car to ‘Lihong’ in return of payment in cash. They form an agreement on the Ethereum blockchain via a smart contract, which states – “WHEN Lihong pays $25,000 to Joe, THEN she will receive ownership of the car”. Since this smart contract agreement is placed in a blockchain environment as explained above, it cannot be changed. Implying, Lihong need not fear that Joe will suddenly demand more money. Also, she need not pay an additional fee to third-party companies like banks, a lawyer or a car broker to prove that she has made the payment. This implies, she won’t have to pay an extra commission or face delays in processing of the agreement due to any external factor. The smart contracts are executed automatically when the related condition is met. At the end of the day, everyone is happy no third party intervention! It's all Trustless.. References: Traders Book - Marcin Kacperczyk, Marvin Neuefeind Explaining Blockchain intuitively to a Five year old! - Nikita Masand Explained: What are Smart Contracts and Their Applications - Chirag