Smart contracts defined

Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the next action when conditions are met.


How smart contracts work

Smart contracts work by following simple “if/when…then…” statements that are written into code on a blockchain. A network of computers executes the actions  when predetermined conditions have been met and verified. These actions could include releasing funds to the appropriate parties, registering a vehicle, sending notifications, or issuing a ticket. The blockchain is then updated when the transaction is completed. That means the transaction cannot be changed, and only parties who have been granted permission can see the results.

Within a smart contract, there can be as many stipulations as needed to satisfy the participants that the task will be completed satisfactorily. To establish the terms, participants must determine how transactions and their data are represented on the blockchain, agree on the “if/when...then…” rules that govern those transactions, explore all possible exceptions, and define a framework for resolving disputes.

Then the smart contract can be programmed by a developer – although increasingly, organizations that use blockchain for business provide templates, web interfaces, and other online tools to simplify structuring smart contracts.


Benefits of smart contracts

Speed, efficiency and accuracy

Once a condition is met, the contract is executed immediately. Because smart contracts are digital and automated, there’s no paperwork to process and no time spent reconciling errors that often result from manually filling in documents.

Trust and transparency

Because there’s no third party involved, and because encrypted records of transactions are shared across participants, there’s no need to question whether information has been altered for personal benefit.

Security

Blockchain transaction records are encrypted, which makes them very hard to hack. Moreover, because each record is connected to the previous and subsequent records on a distributed ledger, hackers would have to alter the entire chain to change a single record.

Savings

Smart contracts remove the need for intermediaries to handle transactions and, by extension, their associated time delays and fees.


Applications of smart contracts

Explore how businesses benefit from smart contracts in active blockchain solutions

Safeguarding the efficacy of medications

Sonoco and IBM are working to reduce issues in the transport of lifesaving medications by increasing supply chain transparency. Powered by IBM Blockchain Transparent Supply, Pharma Portal is a blockchain-based platform that tracks temperature-controlled pharmaceuticals through the supply chain to provide trusted, reliable and accurate data across multiple parties.

Increasing trust in retailer-supplier relationships

The Home Depot uses smart contracts on blockchain to quickly resolve disputes with vendors. Through real-time communication and increased visibility into the supply chain, they are building stronger relationships with suppliers, resulting in more time for critical work and innovation.

Making international trade faster and more efficient

By joining we.trade, the trade finance network convened by IBM Blockchain, businesses are creating an ecosystem of trust for global trade. As a blockchain-based platform, we.trade uses standardized rules and simplified trading options to reduce friction and risk while easing the trading process and expanding trade opportunities for participating companies and banks.

Blockchain topics

Explore our informational guides to gain a deeper understanding of various aspects of blockchain such as how it works, ways to use it and considerations for implementation.

Resources

What is blockchain?

Learn from the ground up what blockchain is all about and how it can benefit your organization. At no cost to you, download a copy of IBM’s Blockchain for Dummies guide.

Blockchain industry applications

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Blockchain solutions

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IBM Blockchain Services

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Writing smart contracts

The IBM Blockchain Platform supports smart contracts written in Go and Node.js. Read this tutorial to learn how to get started writing encoded business logic, terms and conditions for execution on blockchain.

Deploy a smart contract on your network

If you are running an IBM Blockchain Platform network, this tutorial will guide you through writing, packaging and deploying a smart contract using Hyperledger Fabric.

Related solutions

Supply chain transparency

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Blockchain for trade finance

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Blockchain for food supply

Growers, distributors and retailers can build trust and make our food safer, by enhancing visibility and accountability in every step of the food supply.