Let's say you want to buy a car online without a smart contract. To do this, you need:
- A website containing information about all the cars that you would like to see.
- A messenger or email to communicate with sellers.
- A payment system that allows you to exchange money after you have found your car.
- An opportunity to get a refund if the car turns out to be defective.
- It is also necessary to register the exchange of ownership of the car with the authorities.
Each of these steps requires you to trust the website or service you are using, — and most of the time, each part of this process is controlled by another company or individual. An intruder or third party can intervene at any time and change any of the above, invalidating the entire transaction.
Smart contracts eliminate the need to trust so many people in the buying process. The principle of smart contracts can be described in five steps: I. Offer.
The transaction process begins with a proposal from a first party. The first party writes down their conditions in the form of an "if-then" statement and then puts it on the blockchain. II. Negotiations.
During negotiations, the terms of the contract are visible to each party in the blockchain. III. Statement.
Once the two parties agree on the terms of the contract and the events that trigger it (for example, due date, expiration date, price, or other terms), the contract becomes unchanged and cannot be changed by either party. IV. Satisfactory conditions.
After each party approves the contract, smart contracts can independently match the terms that are placed inside the contract code by interpreting the data in real-time.V. Transaction.
As soon as all conditions are verified, a triggering event happens, and the transfer of the approved assets takes place. The assets, in this case, can be stocks, real estate, information, intellectual property, and digital / non-digital media.