What is smart contract_

What is a Smart Contract?

A smart contract is a self-executing contract with the terms of the agreement between both parties being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible. Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. 


History of smart contracts

Smart contracts were first proposed in 1994 by Nick Szabo, an American computer scientist who invented a virtual currency called "Bit Gold" in 1998, fully 10 years before the invention of bitcoin. 

Szabo defined smart contracts as computerized transaction protocols that execute the terms of a contract. He wanted to extend the functionality of electronic transaction methods, such as POS (point of sale), to the digital realm.


How does Smart Contract work?

To understand smart contracts, we must first learn about blockchain. Blockchain is a shared ledger and vast database that is replicated in several places called "nodes". It's impossible to be tampered with and enables us to save and share data securely, even between parties that usually treat each other with caution.

Each block of data is transferred to, and stored on, the replicated blockchains, creating a distributed ledger. Users validate the blocks of information, which link together via crypto stamps that are created with the information from the last block and the stamp from the immediately preceding block (a “chain of blocks”). Once transactions are validated, they cannot be modified or erased without users finding out and the crypto stamp of every block being altered. That guarantees their security and authenticity. Because it’s a decentralized and shared database, blockchain is a new way of transferring assets without middlemen. It also uses cryptography to ensure that information cannot be altered.

With the security of blockchain, smart contracts can run automatically, which removes the need for supervisory oversight. All it takes is a computer program configured to recognize an event that triggers execution.

Because the programmed rules cannot be amended once the smart contract enters into force, each party must understand and agree to them. Each agreed action or clause is then registered in the blockchain.                                                                                                                                                                                                                                                                                                                                                      

Advantages & disadvantages




  1. Autonomy and savings

Smart contracts do not need brokers or other intermediaries to confirm the agreement; thus, they eliminate the risk of manipulation by third parties. Moreover, the absence of intermediaries in smart contracts results in cost savings.

  1. Backup

All the documents stored on the blockchain are duplicated multiple times; thus, originals can be restored in the event of any data loss.

  1. Safety

Smart contracts are encrypted, and cryptography keeps all documents from infiltration.

  1. Speed

Smart contracts automate tasks by using computer protocols, saving hours for various business processes.

  1. Accuracy

Using smart contracts results in the elimination of errors that occur due to the manual filling of numerous forms.

  1. Transparency

Smart contracts operate on a decentralized Blockchain platform. Therefore, the agreement is entirely independent of the third party. In addition, encrypted records of transactions will be shared with the parties involved. So users can rest assured about their interests.



  1. Difficult to change

Changing smart contract processes is almost impossible, any error in the code can be time-consuming and expensive to correct.

  1. Possibility of loopholes

According to the concept of good faith, parties will deal fairly and not get benefits unethically from a contract. However, using smart contracts makes it difficult to ensure that the terms are met according to what was agreed upon.

  1. Third party

Although smart contracts seek to eliminate third-party involvement, it is not possible to stop them. Third parties assume different roles from the ones they take in traditional contracts. For example, lawyers will not be needed to prepare individual contracts; however, they will be needed by developers to understand the terms to create codes for smart contracts.

  1. Vague terms

Since contracts include terms that are not always understood, smart contracts are not always able to handle terms and conditions that are vague.

  1. Can be exploited

Smart contract security plays a crucial role in decentralized applications. An exploit in smart contracts happens due to vulnerability present in them without having a Smart Contract Audit. 


Applications of Smart Contracts

Use for Elections

Manipulating election results is hard but possible. With Smart Contracts, it can never be manipulated. Because the votes are protected by the ledger which will need to be decrypted and strong enough permissions are required to access it. And the truth is that no one holds such power in the blockchain.

Use for business

Blockchain not only provides a reliable ledger but also eliminates risks thanks to an automated, transparent and accurate system. Often, business operations are not always favorable due to waiting for consensus or solving external and internal problems. Blockchain technology will solve this.



The supply chain in any business is an extended system and includes many different departments. Each department has certain jobs, which must be performed sequentially. And it has to be recorded so that when it happens, you know where the problem is

This is a lengthy and inefficient process, but with Smart Contracts, each participating department can track the progress of the work to complete the work on time. Smart contracts ensure transparency in contract terms and anti-fraud.

It can also provide supply chain monitoring if integrated with the Internet of Things.


Health services

With Smart Contracts, the patient's medical records will be encrypted and stored on the Blockchain using a private key, and only those who have that key can access and view the records. At the same time, surgical bills are stored and automatically transferred to the insurance company.

Besides, Smart Contracts have countless other applications such as in management, banking services, insurance, real estate, etc.


Traditional contract vs smart contract

The future of smart contracts

There’s no doubt that blockchain’s real-time characteristic and ability to act as a public ledger of all transactions could revolutionize many parts of financial services, reducing risks and bringing cost savings among other benefits. In the future, blockchain can be mass adoption.

An increasing number of industries are transferring to using smart contracts instead of regular contracts. Indeed, smart contracts are gaining in popularity due to their many advantages. They are cost-effective, secure, traceable, and authentic, making them very attractive to various industries.

However, both smart contracts and traditional contracts have their advantages and disadvantages. Perhaps the future of contracts could rest on the creation of “hybrid” contracts that combine both smart contract technology and the legitimacy of traditional contracts. Then people will use smart contracts and blockchain technology as such a normal thing that they don't even realize that they are using them.


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