What Are Smart Contracts?

June 10, 2022

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Contracts are vital in modern society as they regulate various aspects of business and life.

Typically, smart contracts use a similar concept in the blockchain network to support and execute transactions. They play a crucial role in organizing and securing transactions in the blockchain and are an essential ingredient in maintaining trust within the revolutionary network.

While real-world and smart contracts share most of their characteristics, smart contracts have a bit more on their back. For example, smart contracts add some element of automation in payments and ensure fulfillment.

The following information may help gain a better understanding of smart contracts.

Smart Contracts As Agreements Stored on Blockchain Technology

Smart contracts are not new. In fact, they have been around for a while — computer scientist Nick Szabo coined the term in 1994. What’s more, smart contracts are not even a blockchain-specific concept. They can be stored anywhere with enough computing power and storage space, including conventional databases.

But what exactly is a smart contract? Think of it as an agreement between two parties stored on the blockchain that dictates interaction based on certain conditions. For example, paying a friend back when they lend some money or making sure an individual follows through with whatever task was agreed upon if they paid upfront. In absence of such a mechanism, transactions on the blockchain would be difficult since there would be no way of enforcing an agreement.

A smart contract is stored on a blockchain, a digital ledger used in networks like Ethereum. While many people think of the blockchain as simply “the public ledger”, it is much more than that.

  • The blockchain is decentralized, meaning no single authority manages it. Instead, all transactions are recorded across thousands of computers worldwide. This means the network is accessible to everyone with an internet connectionm but also makes it virtually impossible for anyone to alter records.
  • The blockchain is immutable, meaning it can’t be changed once written into the record. It is also distributed; there isn’t one central location where all data on a particular block must be stored, which makes hacking impossible as there are simply too many copies.
  • Finally, since every user has access to all transaction history on the chain, there is no need for third parties like banks or governments who might try to censor financial information about individual users or companies. This is a crucial component of decentralization.

A Smart Contract Is Not Legally Binding

An essential feature of real-world contracts is their binding nature and enforceability. Breaking the contract comes with consequences for the party that fails to fulfill its part of the agreement.

In contrast, a smart contract is not legally binding. Does that mean individuals can enter into agreements on the blockchain with the intention of never fulfilling their end of the bargain? Not precisely, as that would water down the trust in the network.

Smart contracts do not replace lawyers or other human beings, but they can make certain types of transactions more efficient by reducing uncertainty and automating processes through software code stored on the blockchain.

A Smart Contract as an Agreement

A smart contract is not actually a contract; it is an agreement.

In its most basic form, a smart contract is simply a piece of code that executes when certain conditions are met (the “when” itself is determined by the parties involved). This code can be enforced by humans or machines and stored on a blockchain network.

A Smart Contract Coded to Execute the Terms of an Agreement

The most important thing to know about smart contracts is that they can be coded to execute the terms of an agreement. For example, suppose an individual wants a contract to automatically purchase an item on August 1st. Imagine a fancy watch or something like that; they can set up a smart contract so that it executes automatically at that time.

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Smart Contracts Are In Use In Some Industries

Smart contracts have already been implemented in some industries. For example, they can track real estate transactions and verify insurance claims. They are also being used in the supply chain industry to automate contract fulfillment processes and in the healthcare industry to streamline electronic medical records.

Smart Contracts Can Be Audited for Accuracy and Safety

Smart contracts can also be audited for accuracy and safety. This means that smart contracts can be analyzed by a third party to ensure that they are accurate and do not contain any errors or vulnerabilities.

A few examples of auditing companies include White Hat Security and ChainSecurity. These services will analyze the code of a smart contract to ensure that it works correctly, without any security issues. The goal is to reduce the risk of hacks or losses due to errors in coding.

Smart Contracts Are Not a One-Size-Fits-All Solution

While it is vital to understand how smart contracts work when dealing with them, they are not very close to solving society’s problems.

Smart contracts are a good step toward solving problems in the future, but they are not a perfect solution. Smart contracts do not replace the need for lawyers and other professionals; there will always be disputes between parties as to what their agreement means or what rights are gained through it. In addition, smart contracts rely on human judgment to write them (or at least be involved in generating the code). Someone somewhere has to interpret what they mean when resolving disputes involving them.

There is also no guarantee that Ethereum will stay popular forever. If it fails or is replaced by another system without backward compatibility (or if a better version comes along), then a particular smart contract might become useless overnight!


The smart contract is a new technology that could potentially change the way people do business and interact. It brings many benefits, such as transparency and trust between parties. While there are also some drawbacks, like lack of compatibility with existing systems and vulnerabilities when implemented incorrectly, they are vital for the growing world of technology.

So far, only a few companies have implemented these contracts because they don’t know how much traction will come through them. Yet, their potential is undeniable and will continue to grow and be much better, efficient and sophisticated.