We all have heard the word smart contacts, but what exactly are they? Smart contracts are programs that function when defined criteria are satisfied and continuously maintained on a blockchain. They are utilized to automate the execution of a certain agreement by different parties to have a fair decision without any interference or hindrance.
Smart Contracts follow specific circumstances and when these circumstances are met or validated the activities are carried out by a network of computers. The activities can be transferring payments to parties, sending warnings or alerts, declaring restrictions, or issuing a pass.
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Whenever the task is complete, the blockchain is updated and cannot be modified and results are visible to selected parties that have access to the result alone. Ethereum is widely used among smart contracts. On top of this financial applications such as investing, borrowing and lending are all forms of smart contracts in general.
Life Cycle of Smart Contracts
Step # 1: Formation of the Smart Contract
Initial contract settlements and implements come under the formation phase of a smart contract. This phase includes parties agreeing on the contract’s overall content. The contract then is converted to a code after the agreement from all parties and finally uploaded to the distributed ledger. Nodes of the distributive ledger receive the contract as part of a transaction block.
Step # 2: Freezing of the Smart Contract
In the freezing phase, the smart contract is confirmed by a majority of nodes, — and a fee must be paid to the miners or their services. During this time, the transactions to the smart contract’s wallet address freeze — or they are blocked while giving nodes the governance board.
Step # 3: Execution of the Smart Contract
In this phase, the contract is verified and a code is executed by the smart contract environment’s inference engine. The inputs for the execution are needed from smart oracles and involved parties to execute further. This execution then generates a new set of transactions along with a new state for the smart contract — and they are entered into the distributed ledger and verified.
Step # 4: Finalization of the Smart Contract
The recent transactions along with updated state information are put in the distributed ledger. Later confirmed using the consensus process. The previously committed digital assets are transferred and the contract is finalized to confirm further transactions.