Smart contracts are digital contracts stored on a blockchain that are automatically executed when predetermined terms and conditions are met.
Smart contracts are typically used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the next action when predetermined conditions are met.
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Smart contracts work by following simple “if/when…then…” statements that are written into code on a blockchain. A network of computers executes the actions when predetermined conditions are met and verified.
These actions might include releasing funds to the appropriate parties, registering a vehicle, sending notifications or issuing a ticket. The blockchain is then updated when the transaction is completed. That means the transaction cannot be changed, and only parties who have been granted permission can see the results.
Within a smart contract, there can be as many stipulations as needed to satisfy the participants that the task will be completed satisfactorily. To establish the terms, participants must determine how transactions and their data are represented on the blockchain, agree on the “if/when...then…” rules that govern those transactions, explore all possible exceptions and define a framework for resolving disputes.
Then, the smart contract can be programmed by a developer–although increasingly, organizations that use blockchain for business provide templates, web interfaces and other online tools to simplify structuring smart contracts.
Once a condition is met, the contract is executed immediately. Because smart contracts are digital and automated, there’s no paperwork to process and no time spent reconciling errors that often result from manually completing documents.
Because there’s no third party involved, and because encrypted records of transactions are shared across participants, there’s no need to question whether information has been altered for personal benefit.
Blockchain transaction records are encrypted, which makes them hard to hack. Moreover, because each record is connected to the previous and subsequent records on a distributed ledger, hackers have to alter the entire chain to change a single record.
Smart contracts remove the need for intermediaries to handle transactions and, by extension, their associated time delays and fees.
Explore how businesses benefit from smart contracts in active blockchain solutions
Safeguarding the efficacy of medications
Sonoco and IBM are working to reduce issues in the transport of lifesaving medications by increasing supply chain transparency. Powered by IBM Blockchain® Transparent Supply, Pharma Portal is a blockchain-based platform that tracks temperature-controlled pharmaceuticals through the supply chain to provide trusted, reliable and accurate data across multiple parties.
Increasing trust in retailer-supplier relationships
The Home Depot uses smart contracts on blockchain to quickly resolve disputes with vendors. Through real-time communication and increased visibility into the supply chain, they are building stronger relationships with suppliers, resulting in more time for critical work and innovation.
Making international trade faster and more efficient
By joining we.trade, the trade finance network convened by IBM Blockchain, businesses are creating an ecosystem of trust for global trade. As a blockchain-based platform, we.trade uses standardized rules and simplified trading options to reduce friction and risk while easing the trading process and expanding trade opportunities for participating companies and banks.
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