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 (releasing funds to the appropriate parties; registering a vehicle; sending notifications; issuing a ticket) when predetermined conditions have been met and verified. The blockchain is then updated when the transaction is completed.
Let’s see how this plays out in a supply chain example. Buyer B wants to buy something from Seller A, so she puts money in an escrow account. Seller A will use Shipper C to deliver the product to Buyer B. When Buyer B receives the item, the money in escrow will be released to Seller A and Shipper C. If Buyer B doesn’t receive the shipment by Date Z, the money in escrow will be returned. When this transaction is executed, Manufacturer G is notified to create another of the items that was sold to increase supply. All this is done automatically.
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 to a blockchain platform must determine how transactions and their data are represented, agree on the rules that govern those transactions, explore all possible exceptions, and define a framework for resolving disputes. It’s usually an iterative process that involves both developers and business stakeholders.
Courtesy – ibm(dot)com
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