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A gentle introduction to Smart Contracts

  • Bhumika Dutta
  • May 05, 2022
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By now, everyone has heard about blockchain and its uses, since it is one of the most innovative technologies in history. It introduced the world to decentralization and Cryptocurrency, which is currently one of the most popular trade currencies across the globe.


Blockchain technology is generating a lot of buzz in a lot of different businesses. Industry leaders are adapting and tweaking the technology to meet extremely specific needs as the field of applications expands.


Smart Contracts are particularly important on the Blockchain since they assist to make transactions more safe and secure, as well as more structured. Not only that, but it also makes other components, such as apps that operate on these platforms, more accessible. But, exactly, what is a smart contract? Let us learn more about smart contracts in this article.


What is a Smart Contract?


Smart contracts are essentially programs that execute when certain criteria are satisfied and are maintained on a blockchain. They're usually used to automate the execution of an agreement so that all parties may be confident of the conclusion right away, without the need for any intermediaries or time waste. They can also automate a workflow, starting the following step when certain circumstances are satisfied.


Smart contracts eliminate the requirement for a central authority, legal system, or external enforcement mechanism to carry out trustworthy transactions and agreements between distant, anonymous participants. Nick Szabo, an American computer scientist who established a virtual currency dubbed "Bit Gold" in 1998, 10 years before the development of bitcoin, introduced smart contracts in 1994.


How do Smart Contracts work?


A smart contract is a business logic-encoding software that runs on a specialized virtual machine embedded in a blockchain or other distributed ledger.


A smart contract, is similar to a vending machine, Consider a machine that sells quarter soda cans. If you put a $1 in the machine and choose a beverage, the system is programmed to either give you your drink and 75 cents in change or encourage you to make another option or get your dollar back if your pick is sold out. This is a simple smart contract example. Smart contracts can automate nearly any type of trade, much like a Coke machine can automate a sale without the need for a human middleman.


Anyone may design a smart contract and deploy it on a blockchain. Their code is open and publicly verifiable, allowing anybody with a desire to understand the reasoning that a smart contract employs while receiving digital assets. Solidity, Web Assembly, and Michelson are some of the programming languages used to create smart contracts. Each smart contract's code is kept on the blockchain on the Ethereum network, allowing any interested participant to view the code and the current state of the contract to verify its functioning.


Along with the blockchain and transaction data, each computer on the network (or "node") holds a copy of all existing smart contracts and their current state. When a user sends money to a smart contract, the code is performed by all nodes in the network to achieve an agreement on the conclusion and value flow. This is what enables smart contracts to operate without the need for a central authority, even when users are conducting sophisticated financial transactions with unknown parties.


You will usually have to pay a price called "gas" to execute a smart contract on the Ethereum network. Smart contracts, once put on a blockchain, are largely unchangeable, even by their originator. This makes it more difficult for them to be restricted or shut down.


Benefits of Smart Contracts:


Here are some advantages of smart contracts:


  1. When a condition is satisfied, the contract is instantly executed. Because smart contracts are digital and automated, there is no paperwork to deal with, and no time wasted correcting errors that might occur when filling out documentation by hand.


  1. There's no need to worry about information being tampered with for personal gain because there's no third party engaged and encrypted transaction logs are exchanged among participants.


  1. Because blockchain transaction records are encrypted, they are extremely difficult to hack. Furthermore, because each record on a distributed ledger is linked to the preceding and subsequent entries, hackers would have to modify the entire chain to change a single record.


  1. Smart contracts eliminate the need for middlemen to conduct transactions, as well as the time delays and fees that come with them.


These are the general benefits of smart contracts. Smart contracts benefit a lot of different industries as well, here are a few ways how:


  1. Settlement of trade disputes:


Transaction efficiency is now hampered by costly and dangerous settlement methods. Simply put, the purchasing party will always be vulnerable to fraud since it can never be certain that the selling party would fulfill its promises. Trade approval procedures now consist of a variety of inefficient and time-consuming sequential methods.


Smart contract technology is a missing piece in the trade finance puzzle: a transaction will not execute unless established settlement conditions are satisfied, considerably reducing related risks. The bulk of documentation, KYC, and AML processes can be automated thanks to smart contracts. This lowers a wide range of operating expenses, reduces settlement times, and increases the liquidity of certain markets. 


All parties may see if the smart contract terms have been updated, and any modifications are immutably recorded on the blockchain, creating a reliable historical record.



  1. Mortgage:


Mortgage financing, like trade clearing, is still largely based on antiquated frameworks. To authorize a loan, bank staff and third parties must analyze a slew of financial paperwork before manually transmitting them by email. To be monitored, each document must be signed, making the procedure very time-consuming and prone to human error.


The entire process can be digitized and largely automated with smart contracts. All parties concerned will have access to the digital copies of the papers, and payments will be finalized instantly once electronic signatures are collected.


  1. Construction:


Contracts are well-established in the building business. Everything is normally done through specified contractual procedures, from material delivery to cash transfer through performance monitoring. However, as the sector becomes increasingly fast-paced, the inherent weaknesses of traditional contracting become more obvious. These contracts, by their very nature, can be read in a variety of ways, and they often take an excessive amount of time to administer, reducing productivity and increasing the probability of conflicts.


Smart contracts, when combined with IoT data analytics, can assist the construction sector to optimize efficiency and accelerate payment processing. For example, the system may recognize when a supplier delivers items and immediately transfer payments to that source using computer vision-enabled cameras. This successfully removes middlemen and relieves employees of physical labor. Construction invoice processing may also be streamlined with smart contracts. 


The verification of subcontractor payments due is one of the construction industry's most persistent challenges. Overstating margins, taxes, and union fees have been standard practices in the sector. As a result, project teams are burdened with a never-ending stream of manual work, assessing thousands of ambiguously specified contract responsibilities and delaying payments.



  1. Insurance:


Smart contracts may be used to automate and speed up transactions to some extent. Parties can still utilize a formal agreement to do this, but they must include specific triggers that cause cash to be transferred to a blockchain. To verify that a given event has occurred, these triggers must be connected to the actual world. This may be accomplished with Dapp programming and a variety of IoT devices. Smart sensors may be installed in homes and automobiles to provide real-time data regarding incidents such as gas leaks and streamline claim processing.



  1. Land Registry:


Land title recording is now dangerous, fragmented, and time-consuming. Real estate professionals examine stacks of documentation about mortgage confirmations, construction-specific data, and buyer-seller agreements as part of the process. These manual operations are frequently the source of document tampering and, as a result, fraud.


The owner and buyer IDs, legal description, third-party testimonies, and other pertinent information about the property may all be included in a designated blockchain token. The vendor simply rehashes the digital file to verify IDs, and the buyer easily validates it using his or her public key. Due to the nature of blockchain, such a property transfer procedure makes fraud nearly difficult, since the wrongdoers would require access to the public keys as well as the ability to implant malware into every digital copy.


Demerits of smart contracts:


Here are some demerits of smart contracts:


  1. In terms of scalability, smart contract systems are still regarded as experimental.


  1. Because smart contracts may only refer to information on the blockchain, there will be a need for trustworthy data services, sometimes known as "oracles," that can send information to the blockchain. The methods for constructing oracles are continually being developed.


  1. Smart contract use cases that successfully link actual assets are still in their infancy.


  1. Due to the immutability of blockchain-based smart contracts today, developers must plan for every eventuality that may need changes to the contract.


  1. Smart contracts' code is exposed to all network participants, which may be inconvenient for some applications.


  1. Due to the time it takes for each confirmed block of transactions to be added to the ledger, blockchains have significant latency.


Applications of Smart Contracts:


Here are some applications of smart contracts:


  1. Healthcare:


With a private key, blockchain can store patients' encoded health records. Due to privacy considerations, only particular persons would have access to the documents. Similarly, smart contracts may be used to conduct research privately and securely. 


All patient hospital receipts may be kept on the blockchain and shared with insurance providers automatically as evidence of service. Furthermore, the ledger may be utilized for a variety of tasks, including supply management, drug supervision, and regulatory compliance.



  1. Accounting:


In a variety of ways, smart contracts assist in the transformation of traditional financial services. When it comes to insurance claims, they verify for errors, route them, and then send funds to the user if everything checks up. Smart contracts include essential bookkeeping capabilities and avoid the chance of accounting records being tampered with. They also allow shareholders to participate in transparent decision-making. They also assist in trade clearing, which is the process of transferring payments once the amounts of trade settlements have been computed.



  1. Supply chain:


Paper-based systems, in which forms are sent through many channels for approval, have historically harmed supply chains. The time-consuming procedure raises the danger of fraud and loss. 


By providing those participating in the chain with an accessible and secure digital version, blockchain can eliminate such concerns. Smart contracts may be used for inventory management as well as payment and job automation.


  1. Voting system:


Smart contracts create a safe environment for voting, making it less vulnerable to tampering. Smart contract votes would be ledger-protected, making them very difficult to interpret. 


Furthermore, smart contracts have the potential to raise voting turnout, which has historically been low owing to an inefficient system that requires voters to queue, show identification, and fill out paperwork. Voting may expand the number of participants in a voting system when it is transferred online using smart contracts.




Developers may use smart contracts to create a wide range of decentralized apps and coins. They're utilized in anything from new financial tools to logistics and gaming, and they've kept on a blockchain just like any other crypto transaction. A smart-contract program can't be updated or reversed after it's been uploaded on the blockchain.


Decentralized finance (or DeFi) apps enable bitcoin holders to conduct complicated financial transactions – saving, lending, and insurance — without the involvement of a bank or other financial institution, and from any location on the planet.


This article has been an introduction to smart contracts where we learned about the concept of smart contracts and how they work and delved into the merits, demerits, and applications of smart contracts.

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