Smart Contracts Blockchain: What are smart contracts blockchain?

What are smart contracts blockchain?

The Smart contracts are automatically executed according to predetermined conditions set in the contract without explanation.

Since blockchain is a distributed ledger technology (DLT) that allows data to be stored globally on different servers, it relies heavily on these databases to confirm transactions.

Therefore, smart contracts are calling for the elimination of management overhead.

Smart contracts represent terms and conditions written in code. Once the pre-defined requirements of the contract are met, these terms and conditions will automatically transfer funds from one party to the other.

For example, when both parties agree to exchange cryptocurrency, the transaction will be carried out with the blockchain ledger through an agreement bound to a smart contract.

Today, smart contracts are still very popular in the crypto industry and are mainly used to exchange cryptocurrencies. But it is not limited to cryptocurrency.

In fact, many insurance companies and real estate companies are adopting this standard protocol to obtain better scalability at a lower price. In short, smart contracts are an important part of many platforms.

This is why it is important to have a clear understanding of what smart contracts are about and how they work.

What is the purpose of smart contracts in blockchain?

Since a smart contract is a program running on the blockchain, the user needs to send the transaction to the blockchain to start the program. Once the code is defined and the logic is locked, only the program can be run.

Generally speaking,main purpose of smart contracts are, is to simplify business transactions between the parties by removing the intermediaries involved in traditional business processes.

These contracts are designed to reduce payment delays, the risk of errors, & the complexity of traditional contracts without compromising authenticity & credibility.

Its main unique advantage is that it allows credible transactions without intermediaries.

How do smart contracts work in the blockchain?

The Smart contract refers to a computer algorithm designed to form, control & provide asset owner information.

It is indeed a program running on the Ethereum blockchain to automatically facilitate, verify or execute trusted transactions.To understand how it works, first of all, we must understand the composition of smart contracts.

  • Signature . Two or more parties must agree to advance the proposed terms and conditions.
  • Critically determine the subject matter of the contract. The subject should be in the context of the smart contract environment.
  • Please specify the terms. These terms need to be accurate and detailed. For example, Ethereum’s smart contracts rely on Solidity & Serpent programming languages, so the protocol should be compatible with the precise language in specific mathematical terms.

After setting these requirements, you can enter blockchain-based on smart contract. However,the agreement needs to be negotiated before the terms can be implemented in the blockchain.

smart contracts

Usually, a smart contract automatically triggers operations based on an agreement between the two users maintained on blockchain.

This means that when the seller intends to sell BTC, smart contract will manage the transfer until the BTC is successfully transferred from one to another, one person to another person.

When this happens, the funds will be released and there will be no changes. All information about the transaction will be listed and stored in a public database.

Who created the smart contract?

The concept of smart contracts was first proposed by the famous American cryptographer Nick Szabo.

In 1996, he published an article on smart contracts in Extropy magazine, predicting the benefits & characteristics of blockchain contract applications. Over the next few years, he developed this concept in several articles.

Ian Grigg & Gary Howland are other contributors to the smart contract concept. They published their work on the Ricardo contract in the 1996 as part of the Ricardo payment system.

After Bitcoin & its blockchain appeared and created appropriate conditions, the implementation of smart contracts became possible.

A few years later, this innovation finally spread on the Ethereum blockchain. Today, many alternative platforms allow users to take advantage of this feature, but Ethereum is still a pioneer.

How does the smart contract work?

As mentioned above, smart contracts represent computer protocols, or simply, code fragments as basic technical elements. 

They are used to specify all the terms of agreement reached between the parties to a blockchain transaction. Once these conditions are met, the smart contract will automatically trade.

The blockchain-based system allows its participants to reduce intermediaries and excessive paperwork, because it relies on a public ledger, and any interested party can verify all transactions. 

The core requirement here is to use a suitable programming language to describe all agreement conditions through mathematical rules.

The blockchain represents a distributed network of nodes, each node stores information about all transactions. To cancel a transaction or double spend, more than 50% of all these nodes must be controlled.

Suppose a person wants to initiate a smart contract, they need to download special software and generate a public key to be published in the system. 

Subsequently, a start message should be sent and the node will receive it. When the event created by the smart contract is completed, the code will execute.

For example, if certain requirements are met (a certain amount of money is paid), the vending machine will automatically provide the buyer with the ordered goods. The working principle of smart contracts is the same.

In addition to transferring funds, there are several other use cases:

  • Digital identity : It can remove counterfeits and provide personal identity for digital assets.
  • Financial security : They are ideal for debt management, automatic payments or stock splits.
  • Trading activities : Smart contracts provide a good way to automate trading operations. In addition, with their help, cross-border payments and international trade have become easier to manage.
  • Clinical trials : It provides cross-agency visibility, facilitates and automates data sharing, and enhances confidentiality.
  • Government : Smart contracts can improve the transparency and efficiency of voting.

Smart contract use cases are variable and cover countless opportunities. They may become powerful tools in many areas of human activity.

Characteristics of smart contracts

Smart contracts have some distinctive features that make them different from other forms of financial transactions:

  • Autonomy : Users can fully control their protocol. The smart contract itself is a guarantee that excludes the possibility of interference from any other third parties (brokers, lawyers, notaries, etc.).
  • Security : A basic purpose of smart contracts is to ensure the security of transactions. The information entered into the blockchain cannot be deleted or modified. Even if one of the parties violated the terms of the agreement, the agreement remains intact.
  • Speed : If manual document processing takes a lot of time, it will delay the task completion. Smart contracts minimize individual participation and improve overall efficiency.
  • Trust : Transaction participants do not need to trust each other or trust a third party. The decentralized network provides an environment that ensures that tasks are completed without problems or delays.
  • Cost-effectiveness : Excessive transaction costs can be eliminated. And because the middleman is removed from the process and protocol support, this is possible.
  • Accuracy : The process is automated, so the possibility of human error is significantly reduced.

Examples of smart contracts

Smart contracts are not only suitable for cryptocurrency transactions, but also include daily tasks in financial services and the Internet of Things. To your surprise, they are more practical than anyone thought.

Internet of Things (IoT) : It is the concept of adding Internet functions to everyday objects in the home. Smart contracts can help users achieve distributed and credible access control to the Internet of Things system.

Employment contract : Smart contracts can make the execution of the contract very convenient. In terms of human resources, through the use of smart contracts, detailed employee information such as salary, professional roles and responsibilities can be easily recorded. 

At the same time, the transparency and immutability of smart contracts enhance the trust between employers and employees. 

Both parties can only use smart contract technology to record part of the agreement. In this case, the contract can be:

  • Fully automated, no paper copy required;
  • Partially automated, with paper copies (in this case, it is necessary to agree on which variant has higher priority, text or code);
  • Partial automation, mainly on paper (for example, smart contracts only regulate payments, while dispute resolution procedures can be found in paper contracts.)
  • Copyrighted content: The content owner should receive royalties, but it is often difficult to determine who is the effective content owner because multiple parties may be involved in creating a single work. Smart contracts allow people to easily understand the rights and responsibilities at any stage of the creative process.

Which cryptocurrencies and DApps use smart contracts?

Today, smart contracts are closer to our daily lives than people think. Nowadays, not only big companies recognize them. Many blockchain platforms use them in their activities and use various programming languages ​​to write smart contracts.

Ethereum is one of the most popular choices; this is why its original coding language, Solidity, is widely used by developers. Other blockchains may choose different things.

The following is an overview of the blockchain that can handle smart contracts:

smart contracts

Bitcoin : The Bitcoin blockchain allows documents to be processed by means of smart contracts. However, there are restrictions on processing these files.

NXT : NXT provides smart contract templates. However, the choice is limited because there is not much room for customization.

Ethereum : Ethereum flourishes due to smart contracts because it supports advanced coding and processing with flexibility and efficiency. However, the disadvantage is that it comes at a price. 

Suppose you want to customize something, but you need to contribute ETH tokens as payment for the computer power to execute it.

Stellar : This may be the oldest smart contract platform, but its speed and security can be said to be better than Ethereum. It has a simpler, more direct, and easier-to-use interface. 

However, it is not suitable for complex contract development, because it is mainly to promote simpler smart contracts.

Some of the most popular smart contract-based dApps include online financial platforms such as MakerDAO and Compound, and decentralized exchanges such as Uniswap.

Pros and cons of smart contracts

There is no one-size-fits-all solution, which includes smart contracts. Of course, it is very helpful in the field of decentralized encryption, but it also has its limitations. Here is what you need to know:


The advantages of smart contracts are obvious, and they are the basis for the growing popularity of smart contracts. 

They are autonomy, security, high-speed performance, and the possibility of reducing the costs associated with intermediaries. 

People choose them because they promise affordable but accurate and efficient business transactions.


  • Smart contracts allow the elimination of possible human errors in operations, which is true. But at the same time, there may be errors and weaknesses in the smart contract code itself. These errors can cause huge losses. Due to some code errors, there are numerous examples of platforms being hacked and funds stolen. Take the notorious DAO hacker as an example.
  • The legality of this smart contract is another point of discussion. It is not yet clear how the government and legal authorities should treat and supervise them, because they are beyond the country’s legal system. Whether they can be recognized as contracts by government agencies is a controversial issue. Being outside the legal system also means that criminals can use this technology for illegal activities. Ultimately, this is because smart contract are not always black and white. Therefore the terms and conditions are vague.
  • Irreversible nature .
  • The inability to change certain content in the smart contract may also be a disadvantage. Fixing errors and changing contract terms will be an unsolvable problem.
  • Privacy penetration
  • Transparency is a good thing, but not always. Sometimes users need some privacy. Some platforms try to provide “smart private contracts” to their users, but this practice is not common. In addition, the introduction of new technologies may also involve costs. Only experienced developers can create reliable smart contract.

Generally speaking, this technology still causes many problems. But what will happen in the future? Will there be a new technology that can overcome its limitations or completely replace it?

What is the future of smart contracts?

It is already clear today that the recognition of smart contracts will only grow over time. 

Of course, they will not completely replace traditional paper contracts in the next few years, but they will open up their share in the market, especially when buying or exchanging goods, services, and rights. There is no doubt that they will enter more and more areas of people’s lives.

Legitimacy issues in many countries will be resolved in the next few years because they are inevitable. 

Even today, Arizona and Nevada have revised their respective state versions of the Uniform Electronic Transaction Act (UETA) to explicitly include blockchain and smart contracts.


The benefits of smart contracts cannot be denied or underestimated. They seem to be a good alternative to traditional protocols and provide a higher level of performance. 

If they manage to get a position, they will occupy the contract field, and the agreement will change forever. They will change the way people do business.

Low cost, reduced fraud and delay, and complete autonomy make smart contracts attractive to the public. 

But only by improving the efficiency and certainty of transactions and reducing the need for third parties, smart contracts will become more interesting.

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