Brief: How do smart contracts work?

People are often confused about various terms related to blockchain technology. One of the popular term used in this domain is ‘smart contracts’.  Let’s discuss in brief how smart contracts work. 


How do smart contracts work?

In simple words, smart contracts are decentralized applications using distributed ledger technologies. For example, a person can send 15 ‘ethers’ to his/her friend at a certain date using a smart contract. He/she would create a contract and push the data to the contract for the execution of the program.


There are various functionalities of smart contracts.  It manages the agreements among the users, for example, if a person buys insurance from another person. It mainly functions as a ‘multi-signature’ account. This means that the funds are used only after a specific percentage of users agree for it. It also stores information about an application. It can store information like membership record or information regarding their domain registration. A smart contract also provides the utility to other smart contracts. It is similar to the working of a software library.


Various smart contracts coordinate with each other. For example, let us say one smart contract visualizes the market report and other bets on this data. However, to run each smart contract you need ‘ether’ transaction fee. The cost is determined by the computation ability of that contract.


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