A smart contract in simple language

by Lumai Mubanga

The blockchain technology has introduced many terminologies. Common terminologies associated with this include blockchain itself, micropayments, digital currency, and cryptocurrency, halving bitcoins, trust protocols and smart contracts. If you are new to blockchain technology, surely you have a lot to learn. This article will look at smart contracts in simple terms.

Other than defining what a smart contract is, we will just explain it in plain language. Three basic terms come into play when discussing the underlying idea behind blockchains which include trust, contract and the third party. These terms encompass the very basic fibre on which chains of blocks are designed and built.

Imagine that you meet a friend or indeed a mere stranger and strike a deal to gamble. You agree to stake $100 each into the gamble. The winner will walk away with $200 cash. In this scenario, You have three options.

The first option is to trust that both of you will abide by the terms of the gamble, that is, stake the required amount and allow the winner to walk away with the prize money. However, that trust risks being broken because the friend or stranger or indeed you may fail to honour the agreement by paying the other party.

The second option is to conceptualize a contract with specific terms and conditions. The conditions of the contract may compel both parties to commit to the contract. Such contracts also attract legal fees and possible court arbitrations. Should one of the parties fail to honour the contract, the winner may be left with no options but seek legal arbitration which may be more costly and time-wasting. This too could be a risky undertaking.

The third option could involve a neutral person or entity to act as a witness to the contract. The third-party will collect the total price money, hold on to it and only release it to the winner after the gambling is over. However, alas! Suppose the third part ran away with the prize money? Again, the undertaking could be as risky as the previous two. At this stage, perhaps trust and contract.

This is where smart contracts come in. A smart contract brings with it automation, trust and transparency, besides security, affordability and efficiency. To execute a gamble mentioned earlier, the parties involved will study a simple code written on the blockchain with specific instructions on how each will deposit the $100 stake funds. Further, this program will keep the total funds and then automatically release it to the winner of the gamble. Once initiated, the program runs uninterrupted to the end. Each party is free to check the contract logic, and once it is running on the blockchain it cannot be changed or stopped. This is what a smart contract is in simple terms.