What are smart contracts and how do they benefit us?
Smart contracts is a term used to describe computer code that automatically executes all or parts of an agreement and is stored on a blockchain-based platform. The code can either be the sole manifestation of the agreement between the parties or might complement a traditional text-based contract and execute certain provisions, such as transferring funds from Party A to Party B.
The code itself is replicated across multiple nodes/networks of a blockchain and, therefore, benefits from the security, permanence and immutability that a blockchain offers.
Smart contracts are presently best suited to execute automatically two types of “transactions” found in many contracts:
(1) ensuring the payment of funds upon certain triggering events (2) imposing financial penalties if certain objective conditions are not satisfied. In each case, human intervention, including through a trusted escrow holder or even the judicial system, is not required once the smart contract has been deployed and is operational, thereby reducing the execution and enforcement costs of the contracting process.
See the illustrations of the differences between traditional and smart contracts.
Credit: Harvard Law