How Does a Blockchain Smart Contract Work?

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How do smart contract really work? We won't dig into how a program actually works, because if you remember from our previous video, a smart contract is actually a program that runs on a blockchain.

Lawyers aren't involved in the smart contracts unless it's about a legal topic. But for the most part, a smart contract is a set of self executing rules. What are self executing rules? When something triggers the smart contract, it will execute the rules that are programmed into it, usually in the programming language, Solidity.

It might be something as simple as on the first of every month it will do something. It might be the fact that a particular token has reached a certain price, execute the set of rules to either liquidate the holdings, or go buy another holding.

If that price was below a certain threshold, it might even be to walk through a complex transaction. Something like, if you come to the table with an listed credit score of 790, and you have 45 Ethereum, in your wallet, and you have the title to your home, and if all those things are true, then provide you a loan at a rate equal to the combination of that and a formula. All those things can be found by looking on various places on the Ethereum blockchain.

You could get a loan for a mortgage for 2% 3% 4% or 7%. Based upon all that criteria, it wouldn't matter where you lived, it wouldn't matter who you were. It would only matter that all those other sets of criteria took place and the smart contract would work, execute those rules and ensure that it protected all the lenders.

I mentioned in a previous video, if your balance dropped below a certain threshold, it would liquidate the rest of your balance to make sure that the lenders were whole. That would be another smart contract operating to back it up.

So how smart contracts work is they are triggered by specific events. They execute on the blockchain, and they can enforce, manage, or run complex or very simple transactions on the blockchain to satisfy your needs. Understand that a smart contract is a program that is triggered with self executing rules written in Solidity.

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