Smart Contracts: What are they, how do they work and what are they for? – Telefónica

From the food sector to the healthcare sector, smart contracts can have many uses. Find out what they are and how they work in this article.

To explain what a smart contract is, we could start, although it may seem obvious, by recalling the RAE definition of a contract: “Pact or agreement, oral or written, between parties who are bound by a specific matter or thing, and to whose fulfilment they can be compelled”.

Or, in other words, the rules of the game on which a relationship between two or more parties is based and how they will interact.

Verbal or written contracts can be subject to interpretation, which creates a difference with respect to smart contracts, which are capable of executing and enforcing themselves.

Smart contracts are computer codes with programming languages, which means that the terms of the contract are sentences and commands in the code that form them.

They are based on blockchain technology and can change the traditional way of doing business because of the aforementioned ability to make them run autonomously.

The term smart contract was first used by Nick Szabo in 1996 in his article ‘Smart Contracts: Building Blocks for Digital Markets’.

As we have just mentioned, the security of transactions is guaranteed by blockchain technology. As such, they allow them to operate automatically and autonomously.

It is therefore not necessary for the supervisory body to issue a verification. It is sufficient to indicate in a computer program which result is to be executed.

For these contracts to work properly, it is necessary that each and every party involved knows (and accepts) what rules and steps are in place. Once the execution has started, the programmed rules cannot be changed.

Because of their link to blockchain¸ technology, the value of smart contracts is the security, trust and transparency that they provide between the signing parties, avoiding alterations of any kind (whether misunderstandings or forgeries) and eliminating intermediaries.

To understand more tangibly what they are, let’s look at some examples of blockchain and smart contracts:

There are many platforms that offer these services. Some of the most widely used are the following:

It is also important to know what applications and utilities smart contracts have, in order to know how and when to use them.

The main advantage of a smart contract is that it can execute and enforce itself through a set of programmed parameters. In addition, it executes autonomously and automatically.

Along with the other benefits we have discussed throughout the article, smart contracts can be applied in numerous practical examples of various kinds, avoiding errors or disruptions, regardless of whether they are voluntary or not.

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