Smart Contracts are the heart of blockchain technologies. They ensure decentralized execution of „contracts“ and are intended to ensure consistency in the network.

A conventional contract outside of blockchain technologies consists of an agreement between several persons. Usually, the contract ensures that both parties can insist on their claims and present the contract as evidence in case of dispute to justify certain claims and rights. A classic contract is the rental agreement, which, to put it simply, consists of two elements:

The tenant transfers the rent to the landlord
The landlord leaves the apartment to the tenant
Contracts often consist of sequences in „if-then“ form. When the tenant pays his rent (for the first time), he receives the key for the apartment. This process can be simplified by Smart-Contracts, as the sequence can be automated. A Smart-Contract means nothing other than a sequence of activities that are carried out when a particular event occurs. This can range from rental contracts to complex financial transactions.

What is the difference between Smart-Contracts and Bitcoin loophole contracts?

1. third parties are omitted
The decisive factor is that Smart-Contracts generally do not involve third Bitcoin loophole parties. In order to conclude a Bitcoin loophole Smart-Contract, a notary is not necessary, as would be the case, for example, with property transfers with conventional contracts. Instead, the Smart-Contract is executed by the nodes in the network.

2. activities are performed automatically
The if-then structures ensure that, as soon as the event occurs, the subsequent activity is executed. If person A and person B close a Smart-Contract and A fulfills his condition, then the necessary action will be executed automatically in the network. It is not necessary for B to become active at this point or for a third party to be informed. Instead, the nodes can check the status themselves at any time.

3. all participants are informed about status changes
The decentralized structure requires that the individual nodes process consistent information. This means that all nodes know about status changes when an event occurs.

How is a Smart-Contract executed?

There are different types of Smart-Contracts. The best known platform is Ethereum. There, Smart-Contracts themselves are treated like an account that acts autonomously. So there are no single individuals who have access to this account. Instead, the actions to be performed are performed in the network. This account can be simplified as a set of instructions (program code) that are executed. These include performing calculations, storing information, and sending transactions to other accounts.
Although the Smart-Contracts are written by humans and stored on the blockchain, after that the execution is solely up to the network and the user has no more possibility to make changes. This means that errors can still occur due to incorrect programming.