Smart contracts are a form of self-enforcing code. To be able to understand the opportunities that are made possible by Ethereum, it is important to know how smarts contracts work.
Smart contracts enable you to exchange any piece of valuable data in a transparent manner without the use of a third party. Traditionally, when you are in need of a specific contract or document you would go to a specialized consultant and pay for the service of setting it up. After paying, you wait until the job is done and you will receive the required document.
With smart contracts the need for a consultant, lawyer, attorney, or any other third party is no longer needed. The way in which smart contracts function is often compared to a traditional vending machine. By simply “throwing an Ether into the machine”, a contract will be generated automatically in which the rules and penalties of the deal are already defined.
How smart contracts work in daily life can be illustrated best with an example.
Let’s say you are buying a house and you want to pay with Ethers. A smart contract between you and the vendor is generated in which all the rules of the transaction are defined. Moreover, these rules are also automatically enforced. This means that if you hold up your end of the deal and pay the agreed price, you will automatically receive the keys of the house.