Definition and Functionning of Smart Contracts and Difference From Classic Contracts

Smart Contract Concept

Smart contracts are contracts created in digital form that automatically fulfil predetermined performance obligations in the event that the contract conditions predetermined by the parties are fulfilled. The basis of this self-triggered system is the principle of “if/when…, then”, which is also found in blockchain technology. Therefore, they automatically perform the performance obligations of theparties and provide performance assurance to the parties; In this respect, smart contracts are alsoconsidered as a new generation alternative enforcement method.

Functioning Cycle of Smart Contracts

The operation of smart contracts consists of four phases: create, freeze, execute, finalize. The first phase is the creation phase, designated an conditions of contract, coded and recorded. The second phase is the freeze phase, it obtains data from the external system(oracle services) and evaluates whether the specified conditions are fulfilled. The third phase is the execution phase, when the conditions are met, the contract is automatically triggered and transfers and transfers take place. The fourth and final phase is the finalization phase, transfers and transfers are distributed to the stakeholders through the distributed ledger. Thanks to this cycle, the contract takes place without intermediaries, error-free, and quickly.

Difference of Smart Contracts from Classical Contracts

Smart contracts, like classical contracts, are established by the will of the parties, but there are parties that differ from the classical contract: The first difference is the contract language. Smart contracts are written in scripting language and consist entirely of algorithmic sequences, so it is not possible to comment on the contract. Another difference is in confidentiality, classical contracts are usually bilateral and only these two parties are aware of the contract, whereas in smart contracts, the codes are recorded in the blockchain database, so they cannot be as confidential as classical contracts. In classical contracts, there is an execution and discharge process, while in smart contracts, these actions are performed automatically.