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Smart Contracts- How do they work?

Smart Contracts- How do they work?

15 Feb 2023

Smart contracts owe all their smartness to the fact that they can run automatically. It means that smart contracts are programs that can run all by themselves without relying on any intermediary. This eliminates the involvement of all external entities such as banks, government agencies, etc. Hence, smart contracts can conveniently work independently. They lay the foundation stone of many blockchain technologies these days such as Ethereum. Therefore, for excelling in the domain of blockchain, you must have a very sound knowledge of smart contracts. Therefore, we have formulated this blog, especially for you. By going through this, you will be able to understand their working in the simplest manner. So let us find out how they work. 

How do Smart Contracts Work?

In this procedure, we will try to explain the working of smart contracts in the easiest way possible. Consider a scenario in which there are two parties “A” and “B”. “A” wants to sell his car worth Rs. 500,000 to party “B”. Now let us see how smart contracts will work in this situation. 

Step # 1: Agreement Formation between Two or More Parties

First, both parties “A” and “B” formulate an agreement between themselves. According to this agreement, when party “B” will pay Rs. 500,000 to party “A”, the custody of the car will be handed over to party “B”. Party “A” and party “B” develop a mutual consensus on these terms and conditions.

Step # 2: Translation of the Agreement into a Smart Contract

Once the agreement between both parties has been finalized, it is translated into a smart contract. This happens with the help of coding. All the clauses of the agreement or their important parts are mapped onto respective codes. This code is then executed at the later stages of the process. 

Step # 3: Replication of the Smart Contract on Each Node

After coding the contract, it is replicated on all the nodes of the network. This process takes place so that each node has exactly the same information stored on it. In this way, all the nodes can verify the transaction that is going to take place within the network.

Step # 4: Execution of the Smart Contract 

After all the nodes have got the same information, the smart contract’s execution takes place. This activity runs on all the network nodes. Basically, all the nodes wait for the conditions mentioned in the contract to be true. 

Step # 5: Execution of the Associated Transaction

As soon as the contract’s conditions hold true, the associated transaction takes place. In our example, as soon as party “B” will pay Rs. 500,000 to party “A”, the car will be handed over to party “B”. After that, the new state of the contract will be updated on all the network nodes. Also, this transaction will be immutable. It means that once executed, it cannot be reversed.


By reading this blog, you will instantly learn how smart contracts work. Hence, you will be able to put them to effective use for your particular transactions. However, if you want to build your own blockchain platform, then you can take the blockchain development services of Folium AI.

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