If you want to immerse yourself in blockchain technology and cryptocurrency exchange, you must start with the basics. One of the most important concepts you should familiarize yourself with is smart contracts.

What exactly is a smart contract, and how do they work? This article will delve into the fundamentals of smart contracts for you to appreciate their significance. It will also help you understand why they play a central role in blockchain transactions.

What is a smart contract?

A smart contract is a decentralized application or computer code with business logic to respond to events. They are self-executing contracts in which all parties agree to terms lined in code. A smart contract enables a transaction to be traceable, irreversible, and transparent.

Smart contract execution is an aftermath of digital money exchange, service delivery, unlocking content protected by digital rights management, or other types of data manipulation. Smart contracts can protect privacy by selectively releasing information to meet a specific request.

Smart contracts run on a decentralized network like blockchain technology. This means that the terms stored in a smart contract are stored in a distributed database. The terms cannot be changed as well. A smart contract has the power to automatically execute and enforce itself based on a series of programmed parameters.

The principal value of smart contracts lies in their ability to reinforce security, trust, and transparency between signatories and avoid misunderstandings so people wouldn't need intermediaries to resolve issues.

When you buy a house, you have to sign a sales contract with the property owner. Signing a document may sound like an easy task, but the truth is that this is not a simple process at all. You need the assistance of a bank, a notary, a land registry, and take care of a mountain load of paperwork. Smart contract code exists to simplify this process as much as possible.

This contract can trace its beginnings in 1994. A cryptographer named Nick Szabo came up with the idea of recording contracts through computer code. This contract would be activated automatically once the agreed conditions are met. Using this contract would eliminate the use of trusted third-party suppliers like banks.

The only issue with this idea was that blockchain didn't exist in 1994. Fortunately, it does now. Bitcoin introduced the first use of blockchain technology in 2009. In 2015, Ethereum was founded and introduced smart contracts to the world.

Innovative contract applications and blockchain

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It is ideal for storing smart contracts on blockchain networks because of the technology's immutability and security. Smart contract data is encrypted on a shared ledger, making it nearly impossible to lose the information stored in the blocks. The blockchain serves as the database to confirm all transactions that take place.

The incorporation of blockchain technology into smart contracts allows flexibility for developers. You can store almost any type of data on the blockchain, and you have various transaction options to choose from.

Once the contract condition is met, the contract can automate the release of the funds as stipulated. There is no need for lengthy confirmations or other processes that may delay transactions.

What are the benefits of a smart contract code?

There are many benefits of using smart contracts for digital transactions. Its first benefit lies in its speed. A smart contract agreement is formed immediately once a condition is met. Because the smart contract writing platform is digital and automated, paperwork is unnecessary. Smart contracts promise to save people a lot of time and effort. Because of its sophisticated logic, there's no need to correct errors that usually occur in manual transactions.

Another benefit of smart contracts to manage transactions is trust and transparency. There's no need to worry about tampering with data for personal gain because there are no third parties involved with smart contracts. In addition, encrypted transaction logs are exchanged among the multiple parties involved. This helps in vetting smart contract security.

Because smart contracts are stored on the blockchain network, they're tough to hack. It's virtually impossible to hack smart contracts because each entry is in a distributed ledger. Every entry is linked, so you would have to change an entire chain to change a single record.

In addition, smart contract data are stored on blockchain technology. This removes the need for paper in offices, registries, and notaries. Pollution is reduced significantly through the use of smart contracts.

Lastly, you don't have to go through legal processes and shoulder their incurring costs when working with computerized transaction protocols like smart contracts. This also means you can save time from coordinating with various business teams.

What are the challenges of smart contracts?

While smart contracts use more sophisticated logic, they're not entirely flawless. Automating processes have their disadvantages. One known challenge is security. Smart contracts are used for automated transactions with multiple parties involved. However, the use of smart contracts is relatively new. Hackers continuously identify new attack surfaces that allow them to compromise business intent that details the rules.

Another challenge is the integrity of smart contracts. In a smart contract, one or more oracles (streaming data sources that send event updates) are tasked to protect against possible hackers faking events that enable smart contracts to execute items they should not. A smart contract must be programmed to generate events accurately. This task can be challenging when it comes to complex scenarios.

In addition, alignment can be tricky when it comes to smart contracts. Smart contracts speed up the execution of various processes that involve multiple parties, whether they're all aligned or not. A smart contract executes transactions instantaneously, and things can get out of control when not all parties fully understand their agreed terms.

Lastly, there's also a challenge when it comes to the management of smart contract applications. They're very complicated to manage and implement. Making a smart contract is relatively easy but making changes is nearly impossible. Parties cannot make changes to the terms without developing a new contract.

What are the uses of smart contracts?

How does a smart contract work? Well, smart contracts are a viable alternative to traditional contracts. In essence, you can automatically turn any contract into a smart contract. You can use smart contracts for different purposes. Here are some options you can explore:


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The most practical purpose is the use of savings smart contracts. Users can use a smart contract to invest in virtual currency and grow their money at the same time.


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Smart contracts can be used to store and maintain an organization's records. For example, you can use a smart contract to keep millions of patient records confidential. Multiple hospitals or health institutions can easily view a patient's medical history using smart contracts.

Trade finance

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The majority of commercial activities rely on the approval of their funding. The process can be lengthy and resource-intensive when dealing with fiat money. With the help of digital currency and smart contracts, this period can be dramatically shortened.

Supply chain

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Internet of Things devices such as mobile devices can be used throughout the supply chain. This is to record every step of a product and enhance its traceability. Because a smart contract is automatically executed, loss and theft can be avoided.


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People usually take on mortgages to buy properties or execute property-related transactions. Mortgage transaction costs will be dramatically lowered through smart contracts. This ensures that the new owner can access the property earlier and update all relevant records automatically.

Property market

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Registering and updating property records can be a taxing and lengthy endeavor. Smart contracts record property ownership more efficiently. Moreover, users can register buildings, land and any property, not just houses.

Human resources

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Recruitment experts are tasked to survey various documents to check an applicant's academic record, employment history, and other relevant information. The use of smart contracts can prevent fraud in resumes and help facilitate the recruitment of new hires.

Intellectual property

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Many companies have to undergo years of court disputes because of patent-related issues. Smart contracts can help track which company or individual owns a patent.


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Voting systems can be improved dramatically with the use of smart contracts. Electoral fraud is a big issue in some countries and can be used as a political weapon to destabilize other nations. Smart contracts can help validate every voter's identity and record their vote.

Insurance payment

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The insurance industry spends millions on fiat currency in claims processing and handling. Smart contracts allow companies to determine payment amounts based on the type of policy a customer has in that said company.


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If you want to start a new business endeavor, you can use a smart contract to raise the money needed to pursue it. With Ethereum, users can build an agreement to hold a contributor's funds until the goal is met. The funds are released to the contract owners or contributors based on the final result.

What are the most popular smart contract platforms?

You can execute smart contracts on various platforms. The most popular option on the internet is Ethereum. When using Ethereum, smart contracts are written in a programming language called Solidity. The Ethereum virtual machine executes them. If you're in the market for a trusted platform, Ethereum is your best choice.

Another platform you can explore is Hyperledger. This is an open-source system developed by the Linux Foundation. Technically, Hyperledger is not a cryptocurrency but a flexible platform where you can create smart contracts.

You can also try Counterparty. This platform incorporates data into Bitcoin transactions. Essentially, Counterparty uses its blockchain and allows contracts to be developed in it.

Another alternative to a blockchain is Polkadot. This platform is known for hosting parachains or chains within chains. This allows more transactions than usual.

How Smart Contracts Are Executed

The operation of smart contracts is similar to blockchain transactions. You must follow multiple steps to form a smart contract.

First, a user must initiate a transaction using their blockchain wallet. Multiple users are involved in a smart contract. Hence, business teams must collaborate with developers to define the criteria for a smart contract's desired behavior. This is in response to specific events or circumstances. This involves payment terms, shipment receipt, automatic release of insurance company paid, and the like.

Then, developers must use a smart contract writing platform to create and test the logic of these agreed terms. After the application is written, it is sent to a separate team for testing. For this step, an expert or company that specializes in vetting smart contract security can be used.

Afterward, the smart contract is deployed to an existing blockchain network or distributed ledger once authorized. That smart contract is then configured to listen for event updates from an oracle. Once it obtains the necessary combination of events from multiple oracles, that smart contract is successfully executed.

What does the future of smart contracts promise?

Smart contracts are a relatively new technology. They're incredibly complex, and their potential goes beyond simple events or typical cryptocurrency exchanges. Smart contracts allow transactions in a wide range of fields. They even have the potential to disintermediate financial and legal areas because automating processes is their specialty.

Smart contracts can also significantly impact the role of lawyers in the future. This is because these contracts are gaining capabilities such as customizable templates. In addition, they can also fast-track compliance authentication because of real-time auditing and risk assessments.

Smart contracts have the potential to automate processes that run on IoT and edge computing devices. They may even be used to validate transactions made via virtual currency. You may even use smart contracts to make vending machine purchases in the future.

While smart contracts have gone a long way in a short period, we are still in the early days of blockchain technology. As more people embrace cryptocurrency, the possibilities for smart contracts expand exponentially.

Should you get involved in a smart contract?

While smart contracts have revolutionized various industries dramatically, they are still not widely embraced by the public. A lot of people have yet to appreciate how blockchain works. Hence, there is an apprehension about getting involved in these virtual contracts.

However, by the look of things, the future looks great for blockchain. It's only a matter of time until more people become open to executing agreements online. With the savings people can make, executing one is practical.

Although the technology is not yet perfect, the possibilities are promising. If you're willing to take a leap of faith, you can be one of the people who can enjoy their benefits.


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