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What are smart contracts: All you should know

What are smart contracts: All you should know

Smart contracts are agreements (automated) between two parties. It is written in code and runs on a blockchain, thus making them irrevocable and unalterable. On a blockchain, smart contracts are simply programs that will run once certain conditions are met. 

They are generally used as an automated way to execute agreements so all participants can be sure of the outcome immediately without involving any intermediaries or losing time. Additionally, they can automate a workflow, triggering actions based on preset conditions.

What does an executed contract mean? The term executed contract refers to an agreement that ties two or more parties together. Once this contract is signed correctly, both parties are expected to adhere to the legal obligations outlined in the written agreement. Smart contracts are popularized by Ethereum (ETH), the world’s second-largest blockchain. The network has spawned many decentralized applications (DApps) and other uses. 

An obvious benefit of blockchain networks is automating tasks previously handled by third parties. A smart contract, for instance, can make the process of transferring funds from a client to a freelancer automatic, rather than requiring a bank’s approval. All that needs to be done is an agreement between two parties.

A second example is a regulatory group and its constituents debating a law. A blockchain-based system would allow these two parties to implement the law through a signed agreement. It might make sense to offer users a DApp that explains the new law or has another blockchain-based way for them to interact with it.

Read on to learn about how smart contracts work, their history, and why they are essential.

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Smart contracts: How do they work?

The concept of smart contracts can be described as an “if/then” digital statement that connects two or more parties. A contract is considered complete if the needs of one group are met.

Consider a market that wants 100 ears of corn from a farmer. Upon delivery, the latter will unlock funds within a smart contract. Therefore, farmers receive a payment if they fulfill their obligations (i.e., the contract has been met).

If the farmer misses the deadline, the funds will be refunded to the client.

The above is a straightforward use case. The mass adoption of smart contracts leads to replacing governmental mandates and retail systems. In addition, smart contracts may ultimately eliminate the need for certain disputes to be litigated in court, saving both parties money and time. 

Smart contract code provides most of this security. A contract on Ethereum, for example, is written in the Turing-complete Solidity programming language. Thus, smart contracts have built-in rules and limitations that no one can manipulate. These limitations could help mitigate scams and unauthorized changes to contracts. A smart crypto contract will only be enforceable if all participants sign the contract. This makes it permanent.

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Technically speaking, a smart contract can be thought of as a series of steps. First, it requires parties to agree on certain terms. The two can then decide when the smart contract is completed once they have established the conditions. The smart contract would then be encrypted and stored on the blockchain network with the decision written in the smart contract.

Upon completing the contract, the transaction is logged on the blockchain like any other. Upon completing the transaction, each node will update its blockchain with the revised “state” of the network.

Suppose you wonder whether Bitcoin (BTC) and other networks support smart contracts. Yes, to an extent. BTC transactions resemble smart contracts in a simplified form, and layer-two solutions such as lightning networks have been developed to improve their functionality. Yet Ethereum’s smart contracts remain unique.

Most blockchain networks describe themselves as distributed ledgers. Ethereum consists of what is known as the Ethereum Virtual Machine (EVM), a distributed state machine. Each Ethereum node must keep a copy of a machine state in which the codes of smart contracts are stored along with the rules that govern them. The same limitations apply to all Ethereum smart contracts since every node has the rules embedded within the code.

Furthermore, more than 200 smart contracts were added to the Cardano (ADA) blockchain explorer in September 2021. Marlowe, Plutus, and Glow are the programming languages used to build ADA smart contracts.

Smart contracts: A brief history

Despite popular belief, smart contracts precede blockchain technology. In the 1990s, cryptographer Nick Szabo laid the foundations of the protocol, most popularly implemented with Ethereum since 2014.

The digital currency was called Bit Gold, and Szabo developed it. Although it wasn’t released, it demonstrated the use case of smart contracts in trustless online transactions. Web 3.0 is the trustless, user-powered version of the digital space. Web 1.0 refers to the internet, while Web 2.0 is the present centralized network.

Many people, including the Ethereum website, compare smart contracts to vending machines. With the help of vending machines, vendors can provide their users with products without taking their money and handing over the product personally. With smart contracts, the process is much more flexible.

Over the years, smart contracts have made remarkable strides. In the beginning, these statements were simple if/then statements that a programmer could construct and execute. Due to the shortage of programmers, these “trustless” contracts are centralized. On the bright side, they are also working on ensuring accessibility.

Since their inception, developers have made it possible to create smart contracts without coding expertise. With different programming languages, more alternatives, and human-readable formats, developers make smart contracts easier to read than using the blockchain.

Smart contracts: Their benefits

The benefits generated by smart contracts blockchains include speed, efficiency, precision, trust, transparency, security, and savings, as outlined below.

Smart contracts automate business processes using computer protocols. They save time in many different areas. It reduces the chances of third-party manipulation by eliminating the need for brokers and other intermediaries to approve already signed legal contracts. 

In addition, smart contracts save money by removing an intermediary. The terms and conditions of these contracts are also fully transparent and accessible to all relevant parties. Contracts are irrevocable once signed. In this way, all parties involved are provided with complete transparency.

The blockchain maintains copies of all documents many times, making it possible to retrieve the originals in the event of data loss. Cryptography safeguards all smart contracts against tampering. In addition, smart contracts eliminate the errors caused by manually filling out multiple forms.

What are the uses of smart contracts?

Smart contracts can automate the world in many ways, including automated payments. Below are some of the common smart contract application scenarios.

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Digital identity

There are no limits to what you can learn on the internet. Often companies make money by knowing people’s interests, but people have only limited control over how that information is collected, nor do they enjoy the rewards. By using smart contracts, you have control of your data.

The future of identity will be based on blockchains. A decentralized blockchain would ensure that individuals’ identities are safe from unauthorized access. The user can profit from social media participation and control the loan transaction process if they wish to submit documents to a bank for a loan.

In social media, there are no intermediaries controlling the network. Ultimately, it is up to the users to decide whether the information is made public or private. As a user, if you want to utilize smart contracts to conduct information exchange, like endorsements, you can build a smart contract and choose what data is transacted. Rather than simply taking all their information. The user is the only one who benefits — no third party is taking a cut or secretly storing and selling data.

Banks and other financial institutions are no different. They communicate only by sending documents and transferring information. Your email address won’t be stored and sold to other credit agencies. The user is entirely in charge of their data.

Real estate

A real estate broker is a necessary evil in the traditional world. Many owners hire brokers to take care of the paperwork and find a buyer due to the tedious and convoluted process of selling a house. The seller might find that attractive, but remember that brokers will take a lot of the sale price.

Smart contracts can replace brokers, streamlining the process of house transfers while ensuring they’re just as secure as when done through an intermediary. This is what makes smart contracts “trustless.”

Think of your house deed as a token on the Ethereum blockchain. To sell it, you create a smart contract with the buyer. This agreement would hold the deed in escrow until the buyer pays the appropriate amount. After that, it will be released.

Ultimately, everyone benefits. It’s a win-win situation for both parties: the seller doesn’t have to pay an intermediary, and the buyer gets the house much faster than if a third party was involved.


The use of smart contracts could be beneficial to insurance policies. It would be like entering a smart contract with a provider by signing up for a policy. A smart contract would outline every requirement for a policy, and users would need to sign it if they agreed.

As long as the liable party needs that contract, it would remain open. Funds are released once they have submitted the necessary forms proving the need for insurance payments. Contracts of this type do not require communication with insurance groups or individuals. Documentation is still required to prove the user’s circumstances, but submitting the request and getting funding is almost instantaneous.

When we think of identity, it’s pertinent to remember that drivers will have records of their accident reports and other relevant insurance information. Having access to this type of coverage could lower rates for responsible drivers whose driving history is clean.

Supply chain

Within supply chains, blockchain technology and smart contracts are most commonly implemented.

These locations play a specific role in the supply chain, whether grocery stores, office warehouses, or farmers. However, as these networks become more complex, companies have a challenging time tracking product custody and payments. Automation of smart contracts can increase supply chain accountability by automating and incentivizing all parts.

Let’s say that a grocery store is awaiting an apple shipment from another continent. It expects to receive a specific number or volume of apples. There is, however, the possibility of human error. During the delivery process, workers may have misplaced some apples, stolen them off the line, or lied about all the apples arriving on time. When a grocery store receives its shipment, they will have no idea where the problem exists because one party has messed up the chain.

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The grocery store could use smart contracts to automate the check-in process. Check-ins already exist in a traditional supply chain; however, they must be manually completed. Perhaps a worker must count the items and send in what has arrived. There is the possibility they could deliberately take some of the product, claiming it went missing. American consumers lose $35 billion a year due to supply chain theft. 

Smart contracts are different because they’re trustless. In this scenario, payment would not be released until all apples are received. Parties will pay more attention to supply when using this system since there’s no way to mislead it. The receiving party will receive the payment instantly, which is a great incentive.

Also, the store could keep an eye on smart contracts that are not being fulfilled and choose not to work with those parties. The system will be possible to identify the best clients and eliminate those who shouldn’t be, saving everyone time and money.

What are the biggest challenges facing smart contracts?

The concept of smart contracts is fantastic, but they’re not perfect. 

First of all, smart contracts and blockchain networks are hand-coded. Human error can lead to exploits. An attack in 2016 on Ethereum’s DAO (decentralized autonomous organization) worked as planned. Using a vulnerability in the smart funding contract of the DAO, hackers stole funds from the project.

In addition, these autonomous agreements lack regulatory clarity. On paper, it seems like a smart idea to have a streamlined, secure process for transferring money, but a lot is still dependent on taxation and other government actions. However, how can governments access the data they need if users want complete control?

Smart contracts cannot access data outside their network. At least not yet. Therefore, Ethereum smart contracts cannot import data from existing websites. However, Oracles have a workaround, which transmits information off-chain through the internet and is integrated with blockchain networks. Oracles could potentially play a role in enabling the move toward blockchain-based databases in the long run.

In addition, there is an ongoing scaling issue. Because blockchain networks are inherently impractical for scalability, transaction times vary depending on the activity. While this might seem problematic at first, Ethereum 2.0 aims to solve this problem. It’s still faster than moving money traditional ways in a few days.

The future of smart contracts

Smart contracts are best used for relatively simple contracts, like residential conveyancing. Completion monies can be paid immediately upon signing contracts, which can automatically be written and executed by smart requirements-driven contracts.

As smart contract platforms become more mainstream, they will provide businesses with time and cost savings. In addition, they will enable them to interact with customers and suppliers in novel and innovative ways. Thus, minimal human involvement will allow individuals and decision-makers to focus on their core roles without being distracted by mundane administration and red tape. This is because smart contracts are automating the process.

The use of smart contracts in everyday operations is already common among banks and insurance companies. Smart contracts won’t take long to become a part of our daily routines and lives as they are already present and tested in real-world scenarios. Despite the preceding argument, there is still a long way to go if smart contracts are ever applied to everything.

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