The prospects offered by blockchain technology are unlimited. But how do we take it from something that just only keeps a record of the transactions to something that can be used across various sectors to perform a variety of functions? The answer, smart contracts.
Smart contracts essentially eliminate the need of a central controlling party by providing a framework upon which the users agree. It is kind of a protocol or filter that runs on every node. Smart contracts are the reasons why blockchain have become programmable and through these, people can participate in a blockchain network and can build their own smart contracts or use the existing ones.
The need for smart contracts arose from the need of expanding blockchain technology. The blockchain used by bitcoin is not programmable. Bitcoin purely revolves around the vision of revolutionizing the financial market. It is capable of holding accounts and keeping a record of the transactions that are happening on the network. In order to use this decentralized technology in various other industries besides finance, the need for a framework to do so increased over time.
That is where Ethereum stepped in and capitalized. It is a completely smart contract oriented platform. Ethereum is the second-largest cryptocurrency in terms of its volume. But besides providing a cryptocurrency to the world, it gives the world a platform, a programmable public blockchain network. Ethereum supports the usage and deployment of using smart contracts which takes blockchain beyond the bubble of just recording transactions. A smart-contract is essentially a computer code which is immutable. Once a smart contract is employed on a blockchain, its code cannot be tampered with at all, which means everybody is sure that no forging has taken place. In this way, the need for a central party controlling all the action is taken out of the picture completely because the code in a smart contract handles all the action.
Besides being immutable, smart contracts are also distributed. This means on a blockchain, the output of a smart contract needs to be verified by not only a single party, but by many nodes. Immutability and distributed-ness of smart contracts build a trustless system where one does not have to trust any third party. The automated framework provided by smart contracts does all the work.
Besides Ethereum, there are other blockchains as well that support the usage of smart contracts. Smart contracts can enable banks to issue loans and perform automatic payments. Postal services can use smart contracts to make sure that payments are made on delivery. Insurance companies can use them to process claims made by the people. Smart contracts enable one to perform activities like lending, borrowing etc. On some blockchain networks, people can use their custom-built smart contracts to perform the function that they desire to perform on a decentralized framework.
So, for someone who does not know anything about blockchain, a smart contract is essentially the tool that expands the usage of the blockchain technology besides just recording transactions. It imparts this technology the capabilities to be used for various other actions and to be used in various sectors of the daily life.