Blockchain technology is essential for smart contracts to work. To understand why, it’s important to remember that a blockchain is a distributed, digital ledger to which certain computers, or nodes, are granted access. The first blockchain was set up to record transactions of the digital currency bitcoin. When a transaction such as a bitcoin sale takes place on a blockchain, the details of the transaction are automatically recorded by both sides of the transaction and stored in a block of information that’s immediately shared with and verifiable by all nodes on the blockchain.
In the case of smart contracts, blockchain technology automatically performs contract actions when predefined conditions occur, said Sterna, who has 20 years of experience in consulting CPAs in cybersecurity and risk. The blockchain keeps track of contract terms and enables the automated completion of next steps in the contract process once it verifies that a step is fulfilled.
Let’s say you agree to buy goods from a business using a smart contract. The smart contract holds back payment until delivery is confirmed. “The smart contract then releases payment automatically. This process ensures that the outcome executes correctly,” Sterna said. The process is faster and less expensive than with a traditional contract and removes a lot of human error, he said. In addition, the inherent transparency and immutability of blockchain technology allow all parties in a smart contract to verify transactions and trust that the contract will be kept safe from tampering and fraud.