What are smart contracts?

What are smart contracts?

Smart contracts are similar to the contracts you see in your daily life. Contracts are commonly found in workplaces and legal filings, and they detail actions required for each party involved in a transaction. Traditional contracts require a third-party to be included to handle each transaction in a deal, such as an attorney or a loan-broker. Contracts are full of trust, and Ethereum makes transactions trustless.

Ethereum has created a solution - smart contracts are the new middle man. These contracts are completely digital on the blockchain, which means they can be tracked from the moment they are deployed and have no way of being altered once it is created. For example, say Jack wanted to raise money on a crowdfunding website. Jack would set a goal and would wait for people to donate to his fund. In these circumstances, both the people donating to the fund and the fund itself have to trust that the crowdfunding website will take the donations and hand them over to Jack. There is a lot of risk in this example, as the people donating and the people receiving the donations have to TRUST the crowdfunding website to complete the transaction.

If this example were to use a trustless smart contract instead of a traditional third-party, an intermediary party controlling the transfer of the funds would be unnecessary.

People are being introduced to smart contracts as a way to mediate these trust types of events by handling settlements and storing all the records on the Ethereum blockchain without an intermediary.

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