A smart contract is a computer code running on top of a blockchain containing a set of rules under which the parties to that smart contract agree to interact with each other. If and when the pre-defined rules are met, the agreement is automatically enforced. The smart contract code facilitates, verifies, and enforces the negotiation or performance of an agreement or transaction. It is the simplest form of decentralized automation.
It is a mechanism involving digital assets and two or more parties, where some or all of the parties deposit assets into the smart contract, and the assets automatically get redistributed among those parties according to a formula based on certain data, which is not known at the time of contract initiation.
The term smart contract is a bit unfortunate since a smart contract is neither smart nor is it to be confused with a legal contract.
- A smart contract can only be as smart as the people coding taking into account all available information at the time of coding.
- While smart contracts have the potential to become legal contracts if certain conditions are met, they should not be confused with legal contracts accepted by courts and or law enforcement. However, we will probably see a fusion of legal contracts and smart contracts emerge over the next few years as the technology becomes more mature and widespread and legal standards are adopted.
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