How does a smart contract work?

Technology, Trends

At Rebel Thinking, we have already talked about blockchain, the technology that promises to revolutionize the way value gets exchanged in a variety of sectors. Blockchain performs transactions under P2P protocols and cryptographic techniques in a secure and transparent way, on a model of distributed interaction that displaces traditional intermediaries and eradicates control coming from a central authority.

Smart contracts are nothing more than the codification of orders that get executed on a blockchain, and on which so-called Dapps work. Through programming languages like Solidity or Serpent, smart contracts can only use objective parameters (all nodes must be able to calculate any employed variable). Once the predetermined conditions are completed, the smart contract automatically executes itself on a public blockchain (primarily Ethereum, although Bitcoin is on its way towards accepting smart contracts).

To guarantee the sustenance of the entire Dapps and smart contracts ecosystem, any execution of orders on a blockchain involves spending cryptocurrency. This cost, called Gas, depends on the operations the smart contract aims to perform and serves as a financial incentive for the network to not get saturated, while it maintains the nodes needed to ensure a permanent and secure service.

Dapps will ultimately allow for interaction with the so-called Decentralized Autonomous Organizations (or DAOs), a set of algorithms that self-manage common interests through smart contracts.

The applications for smart contracts are immense. The following infographic represents the sequence of the purchase and sale of a piece of real estate using a smart contract, a pioneering project put into practice in Sweden in June 2016.


For more about blockchain, read the study “Blockchain: building trust” from Rebel Thinking.