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Smart contract is defined as an agreement to exchange goods, services, or money that will automatically execute, without third party oversight, so long as established criteria are met.
In cryptocurrencies like Ethereum, contracts are called “smart contracts” because they are programmed to automatically do something.
Smart contracts have the ability to receive, store, and send cryptocurrencies. Once they receives money, they will automatically do whatever they were programmed to do like sending money. When the smart contract has completed its task, it shuts down.
For example, two people doing business together agree to exchange money for something else. If the requirements set by both people are met on a date, it activates, delivering what was purchased. If the requirements are not met, the smart contract deactivates and returns the money it was storing.
- If Alice wants 1 bitcoin from Bob and Bob wants $5,000. Both Bob and Alice agree that on January 1, 2018, both the bitcoin and cash will be deposited to the accounts linked with the smart contract.
- On January 1st, the smart contract looks to see if both people fulfilled their obligations. If so, it will release the payment and bitcoin to their new owners. If not, the bitcoin and money are returned to their original owners.
- Because the smart contract is publicly available and unalterable, it is very easy to keep both Bob and Alice responsible for their end of the deal. If anyone somehow violates the agreement, the proof of what they should have done is easily obtained.
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