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Smart contracts are amongst the most widely discussed and debated topics in the blockchain industry. More and more processes are becoming digital, and it is vital that we find ways to make business agreements digital, too, while not compromising their authenticity and reliability. One way of doing this is through the use of smart contracts, a more efficient way than traditional ones, which are expensive, time-consuming, and complicated.

While Ethereum is currently the most common smart contract network, it can be run on various other cryptocurrency blockchains, including EOS, Neo, Tezos, Tron, Polkadot, and Algorand.

Anyone can build a smart contract and deploy it to a blockchain. Their code is open and publicly verifiable, allowing anyone with interest to see precisely what reasoning a smart contract employs when receiving digital properties.

What are smart contracts?

A smart contract is a contract that is self-enforcing and controlled by its specific terms and conditions, which stores and processes the contract clauses through the use of blockchain technology.

To enter into a smart contract operated through blockchain, all parties involved must negotiate and agree to the terms and conditions of the contract - as they would with a traditional agreement - before submitting the terms, whether in their entirety or in part in smart contract code, which is then stored in the blockchain.

Smart contracts allow reliable and consistent transactions to be carried out without the intervention of a third party. It is a decentralized process, which means that no mediators are needed at the time of deal confirmation. They often serve as escrow facilities, storing both the money and the ownership rights in the system and distributing them to the parties involved at the same time. Furthermore, hundreds of people are present to observe and verify the transaction, ensuring flawless execution. There is no need for an intermediary since the parties' confidence has been established.

When defined terms and conditions are met, smart contracts automatically execute based on the rules they were configured to follow. Essentially, they work on an 'if/then' process; IF xxx is completed, THEN xxx happens.

When the requirements of a smart contract are met – for example, when goods are delivered, or two parties agree to a cryptocurrency exchange – they will facilitate the transfer of bitcoin, fiat money, or the receipt of goods, allowing them to proceed on their path. A blockchain ledger stores the state of the smart contract behind it all.

Many people use a vending machine as an analogy for smart contracts, as it is an easy way to explain how the concept works.

Consider how a vending machine works. You put money into it, click on the code for the product that you want, and the machine automatically releases the said product. No cashier is needed; no third party is required to oversee any part of the transaction. It is automated, quick, and efficient. This is how a smart contract works.

Smart contracts are not just for financial transactions. They are useful in government dealings, healthcare administration, higher education course administration, banking, and real estate. Smart contracts may theoretically be used in any situation that involves the exchange of goods for services.

The functioning of a smart contract can be briefly described with three main components:

  • Interconnectivity: Each smart contract usually has a limited set of capabilities. Several smart contracts can be linked together to form more complicated structures referred to as decentralized applications or 'dapps'.
  • Objects: These are the signatories who communicate with the smart contract, as well as the subject or subjects that the smart contract modifies based on previously established or newly submitted conditions.
  • Environment: Smart contracts depend on a cryptography environment to function. This guarantees that they can run safely and that the data they use is unchangeable and clear.

The history of smart contracts

Nick Szabo, an American computer scientist who created a virtual currency called "Bit Gold" in 1998, ten years before the invention of bitcoin, introduced smart contracts in 1994. Szabo is often interpreted for Satoshi Nakamoto, the anonymous creator of bitcoin, a claim he has refuted.

Smart contracts, according to Szabo, are computerized transaction mechanisms that carry out the terms of a contract. He decided to take electronic transaction methods like a point of sale, or POS, and bring them into the digital era.

In an article discussing smart contracts, Szabo said:

" Smart contracts reduce mental and computational transaction costs imposed by either principals, third parties, or their tools. The contractual phases of search, negotiation, commitment, performance and adjudication constitute the realm of smart contracts. This article covers all phases, with an emphasis on performance. Smart contracts utilize protocols and user interfaces to facilitate all steps of the contracting process. This gives us new ways to formalize and secure digital relationships which are far more functional than their inanimate paper-based ancestors."

How is blockchain involved in a smart contract?

Blockchains are the fundamental elements of the smart contract. The blockchain is a distributed database maintained by a network of computers, known as 'nodes', that belong to a variety of people. As a result, it is not under the control of any single individual or corporation.

It means that hacking is nearly impossible — if a hacker were to target the blockchain or the smart contracts that run on it, they would have to compromise more than half of the nodes. As a result, smart contracts can run safely and seamlessly without the need for human intervention.

The technology involved in a smart contract

Ethereum, a blockchain-based network, is used to create the majority of smart contracts. Ethereum was formulated by Vitalik Buterin, a Russian-Canadian programmer in 2013, and released for general use by the public two years later.

The Ethereum blockchain uses a decentralized virtual machine -the Ethereum Virtual Machine or EVM - to implement a Turing-complete programming language called Solidity, which has become the dominant model for creating and implementing smart contracts. Solidity is an object-oriented programming language with a heavy procedural base - its main components are imperative instructions.

You will usually have to pay a fee called "gas" to enforce a smart contract on the Ethereum network. It is named so because these payments are what keeps the cogs of the blockchain running.

Ethereum smart contracts are computer-coded contracts that are self-enforcing and immutable. They are self-contained, precise, and unchangeable. The restricted scripting capacity of Bitcoin is why Ethereum is the technology of choice that offers itself for application rather than Bitcoin.

What are some of the benefits of a smart contract?

Accuracy, efficiency, and speed

When a condition is met, the contract is automatically executed. Since smart contracts are digital and automated, there is no paperwork to handle and no time spent correcting mistakes that often occur when documents are filled out in person.

Transparency and trust

There is no need to worry about information being tampered with for personal gain because there is no third party involved, and encrypted transaction records are exchanged among participants.


Since blockchain transaction records are encrypted, they are extremely difficult to hack. Furthermore, since each record on a distributed ledger is linked to the previous and subsequent records, hackers will have to modify the entire chain to change a single record.


Smart contracts eliminate the need for intermediaries to manage transactions and the time delays and fees that come with them.

They are particularly useful for businesses that are working with new clients or vendors. They may not want to risk a traditional contract, as there are many legal hoops to jump through and processes to follow should something go wrong. However, it is all automated with a smart contract - if one party does not meet the conditions laid out in the smart contract, the final part of the transaction does not happen. Because the contract is open and accessible to everyone involved in the blockchain, there is more support and no way of either party defrauding the other.

Are smart contracts legally binding?

A smart contract must have the main elements of a contract defined by the applicable jurisdiction to be legally binding. A legal contract in the United Kingdom usually involves a bid, acceptance, consideration, and purpose.

The word "smart contracts" is deceptive; many smart contracts are more accurately represented as "smart processes," with code that streamlines specific processes to ensure a set of outcomes.

Real-world examples of smart contracts in use

Insurance: Smart contracts have a lot of promise in the insurance industry when it comes to expediting and streamlining the claims process. Consider the case of life insurance as an example. The smart contract will include the policy terms. The notarized death certificate will be issued as the validation trigger for the smart contract to release the payout to the designated beneficiary.

Logistics and supply chains: Smart contracts are changing the supply chain and logistics industries. Blockchain can provide a clear and permanent record of goods transit between multiple handlers off its own back.  Payments can be completed automatically upon delivery, and inventory levels can be adjusted in real-time with smart contracts in place.

Digital token holder rights: Individual token holders can have specific privileges if real-world assets are tokenized. A smart contract will include these privileges. If a company's stock is tokenized, for example, shareholders have voting rights. When a ballot opens up, the shareholders' entitlement to vote is executed. The smart contract helps them to vote and transparently keeps track of it. As a result, shareholders could vote from afar, eliminating the need for them to be physically present or appoint a proxy and remove the potential threat of fraud.

Health care systems: Smart contracts can be used by health systems to record and securely transmit data. It can give patients complete control over their own data, and if researchers and scientists want the data to look at, they have to pay the patient for it - and it gives the patients a choice whether they want to sell it and to whom.

Business payroll systems: Smart contracts can be highly beneficial to businesses. Smart contracts may be used instead of paying employees to manage payrolls. Businesses may simply create a smart contract stating, "when the date is 28.09.21, the business sends employee #234 3 ETH.  This ensures that the employees are always paid on time and are never underpaid. The company profits because it is automated, which saves them a lot of time and money.

Are there any problems with smart contracts?

Even though smart contracts are widely regarded as a flawless and trustworthy method of implementing agreements and reasoning, they are by no means perfect.

Smart contracts, for example, are irreversible on several blockchains. This means that once they are live, they can't be modified or updated, which can have dire effects if the code has flaws - and that has happened before.

The lack of flexibility of a smart contract can also cause businesses problems that do not align with their ethos or way of working. A party can easily justify a violation in conventional text contracts by not implementing the available penalties. Suppose a highly valued customer is late paying their invoice one month. In that case, a vendor can decide to waive any fees or not invoke the suspension of the services they can to preserve the long-term relationship between customer and business. However, if the agreement is moved to a smart contract format, the ability to override the penalty clause is lost. This means the business has less autonomy and flexibility over how strictly they want to enforce agreements and can damage business relationships.

Unknown and novel potential threats are often manipulated, with the result that investors lose capital.

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