What are Smart Contracts?

Let’s say you want to sell your house. You will go and search for an agent who will help you with the paperwork, markets the property, and acts as an intermediary when the negotiations begin and look after the deal until it’s closed. The agent will also provide you with escrow service which will help you in such deals where the amount involved is quite big and you cannot trust the person completely. 

Once the deal is successfully completed, the agent will ask for some commission from the buyer and seller side. Doing so will incur losses to the seller. In such situations, smart contracts come into the picture to revolutionize the entire industry. The smart contracts will follow the ‘If-Then’ principle, where the property will be transferred to the buyer only when the decided amount of money will be sent to the system. 

The money and the ownership will be stored in the system and later distributed to the buyer and seller at the same time. Hundreds of people verifies the transaction, so you can rest assured about the safety of your money and ownership. Ultimately, the trust will be built between the buyer and seller, and there will be no need for any intermediary. All the activities done by the agent can be preprogrammed into the smart contracts. 

What are Smart Contracts?

A smart contract is a self-enforcing agreement between two people in the form of code that is stored in the blockchain and executed when the terms and conditions are met. As smart contracts are stored in the blockchain, they cannot be changed. 

In simple words, a smart contract is a set of code implemented on the blockchain networks to do specific tasks. Smart contracts are designed to minimize human involvement and to complete the tasks more effectively. Smart contracts need to be managed or updated timely by the group of developers to match the updated security standards.

What are Smart Contracts? 1

The transactions in a smart contract can take place without the need for a middleman. The transaction will happen only when the terms and conditions of the agreement are met. Also, smart contracts are trustworthy, as there is no third party involved in the transaction. 

Smart Contracts are immutable and distributed. By immutable we mean that the smart contracts once are written cannot be changed and no one can tamper or break the contract. By distributed we mean that everyone in the network will validate the smart contracts. So, with this distribution, an attacker cannot take control and release the funds because other participants in the network can detect such an attempt and mark it as invalid. 

Smart contracts will be helpful in all situations ranging from financial derivatives to insurance premiums, breach contracts, property law, credit enforcement, financial services, legal processes, and crowdfunding agreements.

Who invented smart contracts?

Nick Szabo, who is a computer scientist and a cryptographer invented smart contracts in 1996. Szabo stated that:

“New institutions, and new ways to formalize the relationships that make up these institutions, are now made possible by the digital revolution. I call these new contracts “smart,” because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied. A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”

Although the smart contracts were invented 24 years back, they were implemented in 2009 when Bitcoin along with its Blockchain appeared in the industry. This provided a suitable environment for smart contracts. In 1998, Nick had designed a mechanism for a decentralized digital currency called Bit Gold. Bit Gold was never implemented but it had many features of Bitcoin, which was implemented 10 years later. 

Smart contracts are mainly associated with cryptocurrencies as decentralized cryptocurrency protocols are essentially smart contracts with decentralized security and encryption. Many existing cryptocurrency networks use smart contracts and they are one of the most hyped features of Ethereum. 

How Smart Contracts Work?

To make it simpler to understand how smart contracts work, let’s consider an example where Alice plans to rent her apartment in Las Vegas and Bob is from London and is looking for an apartment for his journey in Las Vegas. So, Alice and Bob decide to make an agreement using smart contracts. The transactions in the smart contracts will be executed only when the terms and conditions are fulfilled. 

how smart contracts works

The following events can be set between Bob and Alice:

  • Independent storage is created, which will help Alice and Bob to put their money but can’t take it out easily. 
  • Now, Bob can put his money in the storage for rent.
  • Alice will put her address and her apartment code. 
  • Bob will receive her apartment code and address. 
  • If Bob decides to rent her apartment and the address & code provided by Alice is correct, then Alice will get the payment. 
  • If the address and code appear to be incorrect, then Bob will get his money back. 
  • If Bob decides not to rent her apartment, then Alice will get her liquidated damages payment and Bob gets the rest of what he paid. 
  • Finally, at the end of the agreement, it is considered fulfilled and remains stored in the blockchain network. 

These sets of events are mainly used in a one-time smart contract. The blockchain technology guarantees the overall contract fulfillment. The above mentioned smart contract is just applicable to one transaction. So, Alice can create a universal agreement where anyone can rent her apartment and follow the same events as mentioned above. 

Blockchain Networks Using Smart Contracts

There are plenty of examples of smart contracts that are implemented within different blockchain networks. The most notable ones are mentioned below:

Bitcoin: Bitcoin is mainly known for Bitcoin transactions, but its protocol can also be used to create smart contracts. The programming language provided by Bitcoin allows for custom contracts like multisignature accounts, payment channels, escrows, and time locks. Multisig wallets and lightning networks are the best examples of a smart contract on the bitcoin blockchain.

Ethereum: Ethereum is a public blockchain platform designed to support smart contracts. This smart contract framework is programmed in Solidity language and runs smart contracts without any possibility of downtime, censorship, fraud, or third-party interference. Ethereum is the dominator blockchain in the smart contract space. According to the latest data, more than 90% of the smart contract products are based on Eth blockchain.

Side Chains: Side Chains is another name for Blockchain that runs conjoining to Bitcoin. They also offer more scope for processing smart contracts. 

NXT: NXT is a public blockchain platform which has a limited number of templates for smart contracts. In NXT you have to use what is already there, you’re unable to code anything of your own. 

Now there are many platforms available to implement a smart contract. Some of the popular names are Eos, Tron (TRX), Cardano (ADA), ChainLink (LINK), NEO and the list goes on.


Smart Contracts are really awesome, as they offer:

Autonomy: Smart contracts are an agreement that you make and you need not rely on any third-party intermediaries to confirm. The blockchain network manages the execution which knocks out the danger of manipulation by a third party. 

Savings: Smart contracts will save you money, as you need not pay any fees to the notaries, estate agents, advisors, assistance, and any other intermediaries. 

Trust: The documents stored on a blockchain network cannot be stolen or lost as they are encrypted on a shared ledger. So, smart contracts will replace the need for trust. 

Safety: If the smart contracts are written correctly, it is extremely difficult to hack them. The environment for smart contracts is safe with complex cryptography. 

Efficiency: Smart contracts are automated, so they save a lot of time which is wasted by manually filling heaps or paper documents. 

Fraud Reduction: As smart contracts are stored on a distributed blockchain network, their data is validated by everyone in the network. Hence, no one can take control of the funds and release it, as other blockchain participants will identify it and mark it as invalid. 

Record Keeping: All the smart contract transactions will be stored in chronological order in the blockchain and can be accessed along with a complete audit trail. 

Paperless: Paper contracts can be lost, stolen, or destroyed. But, the smart contract comes as lines of code in a digital space. 


  • A lack of international regulations focusing on blockchain, cryptocurrency, and the smart contract will make it difficult for these technologies to monitor in the global economy. 
  • Smart contracts are more complex to implement. 
  • They are impossible to modify. The parties cannot add or modify the smart contract agreement. Ultimately they have to develop a new one. 

Smart Contracts Use Cases

Whether it is a new job or you’re buying a new product, contracts are the only proof of such things. But the traditional contracts will involve high costs, third parties, and manual errors. So, with the emergence of digitization, the process can be more reliable and cost-effective with the use of smart contracts. These smart contracts have applications in different industries and sectors.


In traditional banking, you will have a traditional model of transactions which will include paper contracts. The use of these paper contracts will be costly, will waste a lot of your time and it will be prone to human errors. But the smart contracts are digital contracts that make payments, loans, and all other financial operations automated.

There is a KYC-Chain that will implement smart contracts for individuals, businesses, and financial institutions. There are a few mechanisms in the core of the KYC-Chain which will allow clients to comply with regulatory norms like automatic smart checks, sharing pertinent documents, and get digital attestation on them by the notaries and institutions. 


If the government includes smart contracts in their industry, then there will be no errors in the functionalities. Suppose the smart contracts are included in the voting process, there will not be any possibility to falsify an election. Because the votes will be stored in a distributed register and decoding them will require extraordinary computing capabilities. Hence, it will be impossible to hack the system.


In the healthcare industry, smart contracts are used to streamline processes for insurance trials, increase access to cross-institutional data, and boost confidence in patient privacy. Dentacoin is an example of the use of smart contracts in the healthcare industry. Dentacoin brings patients and dentists together to enhance dental care and make it affordable and accessible all over the world. 

Real Estate

Smart contracts in the real estate industry can be used to sign contracts between parties who want to buy, sell, or rent real estate. Propy is one example of smart contracts being used in the real estate industry. They allow owners and brokers to list their properties and allow the buyers to search and negotiate. Both buyers and sellers can participate in the smart contract to execute their deal.  

Supply Chain

With the use of smart contracts in the supply chain industry, there can be a reduction in the risk of theft and fraud cases. The entities can track inventory and finance supply chains.  Checklists, management reports, invoices, and releases will all be automated. Name Bazaar is an example of implementing smart contract technology within the peer-to-peer marketplace where users can internet domains on the blockchain. 

Internet of Things

The use of smart contracts in IoT will enable significant transformations in the industry creating a way for new distributed applications. Oaken is an example where it offers autonomous IoT hardware and software coupled with the blockchain technology. These components will allow the users to use Oaken with any device to build an IoT network and apply it to various real-life needs. 


Smart contracts have great potential as they can be used for small regular agreements as well as contracts for governments and enterprises too. When you choose smart contracts, you have to check the code thoroughly before executing it. Smart contracts will help you automate and streamline all your routine transactions and processes. The smart contracts should be regularly updated to eliminate any compatibility issues with operating systems and perform their directed functions correctly.