What Are Smart Contracts And How Do They Work?

What is a smart contract

First it is important to realize that contract in this term refers to many things.  

Its really very simple. Contract in this term refers to any instance where value is being transferred from one party to another. So for example, money, tokens, deeds, videos games, shares in a company literally anything that has value that some other party is willing to trade something else of value to attain.

So now what is a smart contract? First someone takes the code that is used to contribute to, verify, or implement a contract and they put in in a block on the blockchain. So essentially that code is encrypted. It is just like a physical contract only it is completely digital and secured. All parties have a key that can decrypt the code and an address where the contract can be sent. So imagine its like you have a po box where anyone with your address can send you a contract but only you can open the other side.

Smart contracts can not be amended and are totally transparent to all parties involved. There is no 3rd party involved making it decentralized and very cheap to execute. 

How does a smart contract work

Lets go through a use case scenario.

Lets say you want to take out a loan with a bank. If it were a physical bank you would need to go to the bank and sit down with a bank executive and decide on the interest rate, principal, EMI, and a bunch of other stuff. Lets say instead you made a smart contract with the bank. This means that the bank couldn't change or amend the contract. There would be no increased rates, no need to track EMI or principal amount. The transaction would be secure, transparent, and timely for both parties. It would be like going online and choosing a loan option that fits for you and that fits for the bank. Also with smart contracts an individual can loan Bitcoin and other tokens making that individual there own little bank.