Crypto ELI5 Part 10: What is a Smart Contract?

In Crypto ELI5, Cryptocurrency by Juan PortilloLeave a Comment

This is part 10 of a series of short cryptocurrency “explain it like I’m five” posts. If you’re just joining us, start here: Crypto ELI5 Part 1: What is a blockchain?

This series of blog posts is meant for the absolute beginner in cryptocurrency. They are also meant to be concise and easy to understand. If you’re interested in learning about crypto, some of the history of crypto, and how to get started with using crypto, follow along! We’ll be adding a new post daily and each post will build on the one previous to it.

What is a Smart Contract?

In a peer-to-peer transaction, one person might exchange a good or service for payment from another person. When we think of currencies, we generally think of them facilitating the payment portion of this transaction. They don’t do anything to determine whether the terms of the transaction have been met satisfactorily. That is the responsibility of a contract. 

Traditionally, contracts come in the form of a long legal document signed by both pirates in ink. Usually put together by legal experts and upheld by a justice system. But what if you could tie the terms of an agreement to the actual currency while also cutting out third parties?

Enter smart contracts. A smart contract is an automatically self-executing contract between two parties that is directly written into code. This code controls the execution of the transaction, and since it lives on the blockchain, it’s trackable and irreversible. Smart contracts augment the exchange of currency with trusted agreements that execute when predetermined terms are met, all without the need for a third party authority or legal system.

The contract takes the form of “if….then…” statements. IF predetermined condition is met and verified, THEN execute a payment.

Check back in tomorrow for Crypto ELI5 Part 11: What is a Dapp?

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