Picture walking up to a vending machine. You enter cash into the machine, press a button, and out pops your snickers bar. There's no human intervention, no waiting, and no one you have to trust to receive your snack: just pure mechanical certainty. This is essentially how smart contracts work in the digital world.

Smart contracts are computer programs stored on a blockchain that both define and enforce the terms of an agreement. Similar to the way a vending machine dispenses your drink the moment you insert the correct amount, a smart contract executes predetermined instructions when predefined conditions are met.

Security via code

After a vending machine is bolted down and programmed, changing its behavior requires physical access, technical expertise, and significant effort. Smart contracts take this further – once deployed onto a blockchain, they are immutable; that is, they can't be altered by anyone, including their creators.*

More notably, smart contracts are responsible not only for the terms of an agreement but also for the execution of an agreement. They're able to enforce agreements by reading and writing data on the blockchain to which they're deployed, which gives them the ability to do things such as transferring assets, counting votes, and all kinds of sophisticated actions. Traditional contracts, on the other hand, rely on complicated legal systems to enforce compliance, requiring trust in lawyers, the courts, and often a whole variety of individuals and institutions, each with their own set of personal interests.

As an example, let's consider a real estate transaction. Normally, something as expensive and complicated as buying a home would require trusting title companies, escrow agents, and legal professionals to ensure both parties fulfill their obligations. With smart contracts, the money for the house and the deed can be swapped at the same instant, the very moment that both parties have provided their part of the deal. If either side fails to uphold their end, the smart contract can guarantee the honest side that they can get their property back.

Naturally, this example would require that the property deed also exists on the same blockchain as the smart contract. While putting houses "on-chain" may seem a bit outlandish today, it's an idea that's already being piloted. Given the benefits in speed, cost, and the reduced need for trust, it's no surprise that this concept is also expanding to other types of assets.

Open transparency

It would be misleading to suggest that smart contracts are infallible just because their actions are predefined or automated. A vending machine that's been filled or otherwise misconfigured can still occasionally fail to vend a bag of chips, and similar caveats apply to smart contracts.

However, whereas a vending machine's internal machinery is hidden away and inaccessible, a smart contract's code is often** published in full, allowing anyone and everyone to inspect it for bugs, hidden trapdoors, or other unexpected behavior. This includes professional auditors, penetration testers, and bug bounty hunters, all of which are financially incentivized to report findings to be fixed.

And while public, open source code provides confidence before interacting with a smart contract, the transparent and decentralized nature of blockchains provides confidence post-interaction that the smart contract operated exactly as intended. Because every transaction is permanently and clearly recorded on the blockchain, it's trivial to undeniably prove that a specific action, be it a payment, transferring of deeds, a vote, or something entirely different, has occurred.

Real-world proof

Smart contracts are already creating substantial real-world value. Decentralized finance (DeFi) platforms use smart contracts to facilitate billions of dollars in lending, borrowing, and trading without traditional financial intermediaries. This is made possible via sophisticated smart contracts, able to automatically calculate interest rates and accrual, manage collateral, and execute liquidations based purely on market conditions and predefined rules. As a result, both borrowers and lenders can receive better rates while taking on less risk.

Insurance is being transformed through smart contracts that automatically pay claims when specific conditions occur. Flight delay insurance can pay out immediately when flight data confirms a delay, all without claim forms, adjusters, or length waiting periods.

A freelancer in Japan and a client in Brazil can use a smart contract that automatically releases payment when work is delivered and verified. Besides removing the need for expensive 3rd party escrow, that same smart contract can also handle currency exchange and payouts in real-time, making delays due to currency-exchange, timezone differences, or banking hours a thing of the past.

The future of agreements

Smart contracts represent a fundamental reimagining of how agreements in general work. By encoding trust in transparent, immutable code rather than institutions and chains of intermediaries, we can create a more secure, efficient, and accessible system for coordinating human activity.

In the same way vending machines changed retail by removing the need for a shopkeeper, smart contracts rewrite complex agreements by removing the need for intermediaries. By combining sophisticated cryptography, open standards, and automated execution, they provide an unparalleled combination of security, transparency, and reliability.

*Not all smart contracts are immutable. Additionally, the configuration of a smart contract may be updated after deployment, depending on the contract. It's important to vet smart contracts before interacting with them.

**Not all smart contracts have their code published.