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What Are Smart Contracts In Blockchain

Published June 23, 2023 9:20 AM
Andrew Kamsky
Published June 23, 2023 9:20 AM

Key Takeaways

  1. Smart contracts are self-executing agreements with the terms of the agreement directly written into code.
  2. Smart contracts offer increased efficiency and automation, transparency, and immutability, and save costs by reducing the involvement of intermediaries.
  3. Smart contracts are typically deployed on decentralized blockchain platforms like Ethereum.
  4. Smart contracts can serve industries, including DeFi, supply chain management, digital identity verification, real estate transactions, and intellectual property rights. 

Smart Contracts, Explained 

Smart contracts are agreements that automatically carry out their obligations as they are encoded in code. Blockchain networks are used to deploy smart contracts, which makes them decentralized and hard to hack. The code and results of a smart contract’s deployment are recorded on the blockchain, making them visible and unchangeable.

Nick Sabo, a computer scientist, was the first person to propose the concept of smart contracts back in 1994. Yet, it was until 2015 that the implementation of smart contracts on blockchain technology was popularized by Vitalik Buterin, on the Ethereum blockchain

The decentralized nature of smart contracts brings numerous benefits to participants. These contracts are validated by the network, eliminating the need for a third party to intervene. As smart contracts execute predefined actions based on specified conditions, resulting in reduced costs associated with contract creation. This increased efficiency and transparency enhance the overall transaction process.

How Smart Contracts Work?

Traditional contracts necessitate legal enforcement, manual execution, and trust to fulfill the written contractual obligations over time. Using the Ethereum blockchain, smart contracts bypass inefficiencies associated with traditional contracts, such as cost and the need to trust.

To understand how smart contracts work, let’s consider an example of a popular crowdfunding platform, Kickstarter. Normally, Kickstarter acts as a trusted third party, overseeing the funding process between project creators and supporters of a specific project.

In a smart contract scenario, project creators would create a smart contract specifying their funding goals and conditions. Supporters load funds to the smart contract, which releases them to project creators once funding goals are met. 

If the conditions are not met, funds are returned to the supporters, eliminating the need for the supporters to trust the project creators.

Smart contracts may be utilized in various industries, such as banking, insurance, and real estate for streamlined buying and selling processes. The key features of smart contracts are their immutability and distributed nature. Once a smart contract is created, it cannot be changed, providing trust and security. 

Blockchain Technology And Smart Contracts

The role of blockchain in enabling smart contracts is fundamental to ensure trust, as it provides the necessary infrastructure to operate on a distributed network where multiple participants validate and verify transactions associated with smart contracts. 

This eliminates the need for a central authority to oversee contract protocol and reduces the risk of fraud or manipulation found in traditional contracts today. Additionally, the immutability of blockchain ensures that once a smart contract is deployed on a blockchain network, it cannot be modified, enhancing trust and integrity. 

Several blockchain platforms have emerged as pioneers in facilitating smart contract execution. Ethereum, the most well-known platform, introduced the concept of smart contracts and remains a prominent player in the space. Its programming language, Solidity, offers a wide range of functionalities and application possibilities. 

Other blockchains like Solana , EOS , and Tezos also provide infrastructure for smart contract development, enabling the execution of agreements based on specified logic and protocols.

Use Cases Of Smart Contracts

Smart contracts are revolutionary because they are redefining how industry may set up their daily operations to benefit from the smart contract’s trustless feature. Let us consider:

Financial Applications 

Smart contracts have revolutionized decentralized finance (DeFi) by enabling peer-to-peer lending, decentralized exchanges, and automated investment strategies. Aave , built on the Ethereum blockchain, enables peer-to-peer lending without the need for intermediaries such as banks. 

The platform leverages the power of smart contracts to facilitate the lending process, ensuring that loans are executed and enforced without relying on a centralized authority.

Supply Chain Management 

Blockchain technology has the potential to greatly enhance supply chain management by increasing transparency, traceability, efficiency, and security throughout the entire supply chain. 

TradeLens  was founded to digitize the global supply chain leveraging blockchain technology for customers offering them seamless container-tracking visibility in near real-time. Itensures digitization when tracking goods, secures transactions between participants, and enables real-time visibility into the supply chain. 

Digital Identity Verification 

Authenticating and confirming the identity of individuals through digital means for secure online interactions is one tool offered by smart contracts. 

IBM Blockchain Identity  provides secure and decentralized identity verification, allowing individuals and organizations to maintain control over their data. Its smart contract application can utilize identity data to verify the authenticity of parties involved in a transaction or to establish conditions before accessing certain services.

Real Estate Transactions 

Smart contracts streamline real estate transactions by automating processes such as property transfers, escrow arrangements, and rental agreements. 

Propy (PRO)  is a blockchain-based real estate platform that allows users to buy, sell, and transfer property digitally, streamlining the process and reducing the need for intermediaries. Smart contracts on the Propy platform ensure that the transaction terms and conditions are automatically executed when predefined conditions are met.

Intellectual Property Rights 

Legally granted exclusive rights are a means to protect creations such as inventions, artistic works, and designs.

The platform Bernstein  leverages blockchain technology to provide a secure and tamper-proof method for recording and verifying the authenticity of certificates. It aims to protect and enforce IP rights by establishing a reliable and immutable record of ownership or creation. 

Benefits And Challenges Of Smart Contracts

Advantages Of Smart contracts:

  • Efficiency and automation: The automation capabilities of a contract eliminates the need for intermediaries and manual processing. Predefined conditions laid out in the smart contract streamlines processes, reduce human error, and increase the speed of transaction dealings.
  • Transparency and immutability: The recording of the contracts on a blockchain, provides transparent and immutable transaction history. Moreover, participants can access and verify the contract’s terms, fostering trust, and reducing the possibility of fraud or manipulation.
  • Cost savings and reduced intermediaries: Smart contracts eliminate the need for intermediaries, such as lawyers or escrow agents, reducing risk and associated costs. 

The Challenges Associated With Smart Contracts Include:

  • Legal and regulatory considerations: Determining the enforceability of smart contracts in different jurisdictions and aligning them with existing laws may be challenging. As contract interpretation requires careful consideration, individuals might end up bound to a contract that was not clear upon entering resulting in potential exploitation.
  • Security and vulnerabilities: Smart contracts are vulnerable to coding errors, bugs, and hacking attempts. Once deployed on the blockchain, they become immutable making it difficult to correct contracts with mistakes. Ensuring the security and robustness of smart contracts is important to prevent unauthorized access, manipulation, or exploitation.
  • Scalability and interoperability: Difficulty in scaling to handle a high volume of transactions without compromising performance. Also, achieving interoperability between different blockchain platforms and integrating smart contracts with existing systems can be complex.

Future Outlook Of Smart Contracts

The future of smart contracts is characterized by emerging trends that have the potential to significantly impact various industries and sectors. One notable trend is the integration of smart contracts with the Internet of Things (IoT) and Artificial Intelligence (AI).

Together they enable smart contracts to interact with IoT devices, enabling automated and secure transactions in real time. AI enhances smart contracts by providing advanced analytics, and decision-making capabilities, and improving contract execution efficiency.

The potential impact of smart contracts extends to various sectors within industries. In finance, smart contracts have the potential to revolutionize traditional financial services, such as banking, insurance, and lending, by automating processes and reducing the need for intermediaries. 

Supply chain management may benefit from smart contracts, ensuring transparency, traceability, and efficiency in the movement of goods. Furthermore, the healthcare industry can leverage smart contracts to securely manage patient data, automate insurance claims, and enable efficient sharing of medical records. 

Other sectors such as real estate, energy sector, intellectual property rights, and legal services are also exploring the potential of smart contracts to streamline processes, enhance security, and reduce costs.

The impact of smart contracts whilst still in its inception is being viewed as a mechanism to be transformative across multiple industries, revolutionizing processes, increasing efficiency, and improving transparency.


What are smart contracts? 

Smart contracts are programmable code on blockchain that automates actions based on predefined conditions.

What are the benefits of smart contracts? 

Smart contracts reduce costs, increase transparency, and eliminate the need for intermediaries.

How do smart contracts work? 

Smart contracts execute actions automatically when specific conditions are met, leveraging blockchain validation.

How are smart contracts different from traditional contracts? 

Smart contracts eliminate intermediaries and trust in third parties, operating on a decentralized network.

What are some use cases of smart contracts? 

Smart contracts can be used in finance, supply chain, digital identity, real estate, and intellectual property industries.