smart contracts

What are smart contracts?

Smart contracts can be understood as automated agreements that two parties get into. These are stated in code and fed to the blockchain which in turn makes it irreversible and immutable. In general, they’re used to automate the process of executing an agreement to ensure that all parties are in the loop about the conclusion without any intermediaries in the picture. They may even make a workflow automatic that begins when the set conditions are met. 

What does an executed contract mean? It is basically a signed contract that guarantees a contractual interaction established between two or more parties. Every party in the contract agrees to stand by the legal duties they’ve mutually agreed upon as has been spelled out in the agreement signed. Smart contracts have become popular thanks to Ethereum which is the second most popular blockchain in the world. They have contributed greatly in creating a wide number of decentralized applications (DApps) as well as many new use cases for the network. 

A major advantage of blockchain networks is that they’ve made it possible to automate the tasks that would typically be done through an intermediary. For instance, to transfer funds, you need to first get a bank’s approval but with a smart contract, you can directly send out funds to another party. 

Read More: How to choose a live trading system for crypto trading?

Benefits of smart contracts

Accuracy, Speed, and Efficiency

  • When the predetermined conditions are met, the contract is executed right away. 
  • The digital and automated nature of smart contracts imply less or almost no paperwork. 
  • It saves time as one no longer has to keep correcting documentation errors. 

Trust and Transparency

  • Since there is no third party in the picture, one does not have to be concerned over the possibility of someone tampering information for personal use. 
  • Participants exchange encrypted transaction logs. 


  • Hacking blockchain transactions is extremely hard because of encryption. 
  • Additionally, since every single entry on the distributed ledger is connected to entries made before and after, hackers would have to make changes to the chain to be able to mess with just one record. 


  • Smart contracts rule out the need for a third-party to carry out transactions. This also takes time delays and fees out of the picture. 

How does a smart contract work?

Consider smart contracts to be digital statements underlining the ‘if and then’ factors between two or more parties. If the needs of a single group are met, then one could honour the agreement and then the contract is said to be complete. 

Let’s look at the steps:

Step 1: Business teams work in tandem with developers to outline their criteria as to how they want the smart contract to respond to particular circumstances.  Some examples of these circumstances are authorization, shipment receipt, or a utility meter reading threshold, etc. 

Step 2: Complicated operations like establishing the value of derivative financial instruments or releasing insurance payments automatically could get coded. 

Step 3:The developers can make use of smart contract platforms so that the logic can be tested and created beforehand. Once the application is written, it is shared with another team to test security. 

Step 4: You can reach out to an internal expert or company which has the expertise in checking smart contract security. 

Step 5: The contract can then be used for an existing blockchain or other distributed ledger after authorization. 

Step 6: The smart contract then gets configured to track event updates via an ‘oracle’ which is essentially a streaming data source that has been secured by cryptography. It can only be used after deployment. 

Step 7: After it gets all the important combinations of events from oracles, the smart contract gets executed. 

Application of smart contracts

Digital identity

Information is as good as currency on the internet. Companies make profits worth billions by simply accessing what interests people. Unfortunately, people cannot always control how someone can access their data nor do they make any profit from it. Smart contracts allow people to be in control of their personal data. 

In the future with blockchains, identities will get tokenised. This implies that every individual’s identity will exist on a decentralized blockchain where it will remain safe from miscreants. So when a user wants to engage in social media or add documents for a banking purpose, they would be able to profit from the social media engagement and be able to control the transaction process. 

Real estate

Real estate brokers are an important part of the typical transactional world. Given the fact that selling or buying a house can involve long and convoluted processes, one relies on a broker to take care of the messy parts such as paperwork or finding the right buyers. Even though this could be really convenient, one cannot overlook the exorbitant fee they may charge on each sale. 

Smart contracts could take brokers out of the picture and tidy up the process of transferring ownership of the house without compromising on security. It lives up to its identity of being ‘trustless’. 

Picture it like this, the deed of your house is put on a token on the Ethereum blockchain. When you want to sell it, you create a smart contract with the buyer of the house. Until the buyer submits the funds in a proper way, the deed is held in escrow by the contract. It is released only after the funds are processed. This is practically a win-win situation for everyone.


Insurance policies can be made much more comprehensive and easy to deal with by using smart contracts. In essence, when you sign up for an insurance policy, you will get into a smart contract with your insurance provider. The policy requirements can be articulated and out in code for the smart contract. If you agree to the policies you may sign the contract which would remain open until you need it. When the need arises, you can upload the forms to support your claim so the funds can be released. 

A contract like this can remove unnecessary communication with insurance groups and agents which may cause further delays. Though you may still have to do some paperwork to establish your requirements, the submission and funding that follows will happen quickly.

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