Smart Contract was first termed by Nick Szabo in 1997.
Nick wanted to create a distributed and secure ledger to store contracts. He termed these as smart contracts. The difference between a smart contract and a normal one is that the former is completely digital.
A smart contract is a tiny computer program that is stored inside a blockchain.
To understand how Smart Contracts work, we shall use the example of Kickstarter.
Kickstarter allows startups to request for funding from other people who find interest in the company’s projects. In other words, Kickstarter acts as a third party who collects this money and sends it to the startup once the required money is raised. If the project is not completed, the investors would like to have a refund. Thus, there needs to be a trust system between the investors, the startups and Kickstarter.
With smart contracts, we remove the need for a third party.
We can program the smart contract to hold all the funds sent by the investors. Once the goal is reached, the money will get transferred to the company for them to start their project. If the goal is not achieved, the money will get sent back to the investors. Since smart contracts are linked to the Blockchain, everything is completely distributed.
So why should we trust a Smart Contract?
Since they are on the Blockchain, they are immutable and distributed. Thus, tampering with smart contracts becomes almost impossible.
The biggest Blockchain that supports Smart Contracts is Ethereum. They can be programmed in Solidity.
Watch the full video on YouTube by Simply Explained below: