What is a Smart Contract?

A smart contract is a set of rules coded on a blockchain that activates when conditions are met. 

Smart contracts are distributed, immutable, and self-executing. Let’s break that down. 

Distributed, Immutable, and Self-Executing

Smart contracts are distributed on the blockchain, meaning the details of the contract are open and available to everyone. Also, once the contract is active, there is no centralized authority like a corporation or government dictating it.

Smart contracts are immutable, meaning the contract cannot be altered after it is deployed. 

Smart contracts are self-executing, meaning, when the conditions of the contract are met, it triggers the next action automatically.

A Smart Contract Example

Nick Szabo, computer scientist, legal scholar, and cryptographer, first proposed the idea of a smart contract in 1994, well before Bitcoin existed. He used the example of a “humble vending machine” as an early iteration of the technology. 

Let’s look at the the functionality of a vending machine — 

If a user inserts money into a vending machine and inputs their selection the machine then dispenses the requested item.

Here’s a visual via Matt Stokes —

You give the funds, you get the goods. 

The set of rules are set beforehand, all parties know them, and they trigger automatically. 

Smart Contract Applications

Smart contracts can be used to exchange money, deliver services, unlock projected data, etc…  

Nick Szabo states, 

Their main function is to programmatically execute business logic that performs various tasks, processes or transactions that have been programmed into them to respond to a given set of conditions.

In other words, a smart contract is like an If/Then function that can perform an array of digital actions.

Additional Resources

Nick Szabo – Smart Contracts: Building Blocks for Digital Markets (1996)

How Smart Contracts Will Change the World — Olga Mack (TEDxSanFrancisco) 

What are smart contracts on blockchain? (IBM)

5 Examples of Blockchain Smart Contracts (Kaleido)

This is the fifth installment in The Osprey Crypto Made Simple Series where we describe a concept clearly and concisely. If there’s something you would like us to define, please reply to this Newsletter email or, if you are reading this on the web, hit us directly at riley@ospreyfunds.io.