A smart contract is a self-executing contract with the terms of agreement directly written into code, and deployed in a Blockchain.
Smart contracts are computer programs that facilitate, verify, or enforce the negotiation or performance of an agreement. They allow for trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. They render transactions traceable, transparent, and irreversible through the use of blockchain.
Smart contracts were first proposed by computer scientist and cryptographer Nick Szabo in 1994. Szabo introduced the concept in a paper titled "Smart Contracts: Building Blocks for Digital Markets." In his work, he described the idea of self-executing contracts with the terms of the agreement directly written into code. These contracts would automatically execute when specific conditions were met, without requiring intermediaries.
The concept of smart contracts laid the groundwork for the development of blockchain technology, particularly the Ethereum blockchain. Ethereum, created by Vitalik Buterin and launched in 2015, is a decentralized platform that enables the creation and execution of smart contracts. While Nick Szabo's initial proposal was not implemented on a blockchain, it served as a significant inspiration for the development of smart contracts as we know them today.
Let's consider an insurance company that offers a policy for flight delay compensation. The traditional process to claim compensation can be cumbersome, involving the passenger filing a claim after the delay and then waiting for the insurance company to verify the information and process the claim, which could take several weeks.
With smart contracts, this process can be automated and sped up.
This not only simplifies the process but also makes it transparent and increases trust in the system, as the terms are pre-agreed, immutable, and the execution is automatic.