Understanding Smart Contracts

A traditional contract is an oral or written agreement with a set of conditions. These contracts require third parties such as the bank or a notary to act as middlemen for the contract’s fulfillment.

While this system has been in use for many years, it has flaws. For instance, a simple transaction can take 2–3 days to complete due to human interventions. Moreover, if some conflict occurs, it takes plenty of time and resources to resolve.

With the emergence of blockchain technology, a new possibility for such contracts has been introduced. It is more trustworthy and eliminates third parties to manage transactions. It also needs little to no human intervention and is therefore fast, efficient, and reliable. These contracts are known as smart contracts.

What are smart contracts?

Smart contracts are blockchain-based computer codes that can automatically store, verify, and execute rules when the required conditions are met.

The concept of smart contracts was first proposed in the early 1990s by a well-known cryptographer named Nick Szabo. However, it didn’t get much attention due to the lack of technology and platforms capable of running smart contracts.

No entity can modify a smart contract deployed on the blockchain. It means that once generated, nobody can manipulate it by any means.

How does a smart contract work?

The mechanism of a smart contract is like that of a vending machine. Let’s say you want to buy a coke which costs $2. If you insert $2 in the vending machine, it’ll give you a can of coke, but if you insert $1, it’ll simply return your $1.

Similarly, smart contracts use if-then logic for execution. They are programmed in a way that when certain conditions are met, they automatically execute the actions associated with the conditions.

Smart contracts use a blockchain ledger maintained on a distributed network. Each network has its copy of the smart contracts making manipulation of smart contracts virtually impossible.

What are the applications of a smart contract?

The concept of the smart contract is new, but it already has numerous purposes. Let’ discuss some of them:

1. NFT: An NFT is a crypto asset that represents a real or virtual entity. Smart contracts have allowed artists and creators to sell their digital artwork directly to their fans (link NFT blog).

2. Banking Transactions: We can use smart contracts for various financial transactions like giving loans, mortgage payments, insurance, or selling a real-world entity like a house or a car.

3. E-commerce: The E-commerce industry can use smart contracts to ensure payment on the successful delivery of products.

4. Government: Governments can use smart contracts to secure crucial data on the blockchain, such as managing votes, conducting census even identity management.


Although Bitcoin’s blockchain can create smart contracts, the concept popularized with Ethereum’s blockchain, it is still the most popular platform for developing smart contracts. Apart from Ethereum, other popular platforms supporting smart contracts are Hyperledger, Neo (NEO), Solana (SOL), Stellar (XLM), and Polkadot (DOT).

Smart contracts have an enormous potential to change our daily transactions and make them more convenient. However, there is still much work to be done before scaling its use.

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