What is Smart Contracts – Blockchain Basics

what is smart contracts

Smart contracts are a futuristic tech that is combined with blockchain; which has various real-life utilities. Its primary feature is that In our series of blockchain technologies, we will cover this tech to provide an easy-to-understand explanation.

Let’s get started!

What is Smart Contracts?

Just like regular contracts, smart contracts are an agreement between two parties, however, smart contracts can be automatically executed. In technical terms, a smart contract is a computer program that can be automatically executed if certain conditions are met, these conditions are pre-determined.

Let’s take the example of the vending machine.

  1. If you insert $5 and press A2, the machine will dispense a soda can in the A2 slot.
  2. Here pre-determined conditions were, you’ll get a soda can if you press A2 and insert $5.
  3. Once the vending machine met these conditions, it automatically executed the second half of the agreement, which is dispensing a soda can.

No intermediary or third-party approval is required, it will be automatically executed as per its code.

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How Do Smart Contracts Work?

In technical terms, smart contracts are codes written on blockchain that follow the ‘if when/then’ mechanism. In blockchain, when these conditions are met, the codes will automatically execute with the help of nodes (networks of computers).

What type of actions can smart contracts perform?

They can perform various technical actions, however when this technology evolves they might perform various complex actions as well.

Following are some of the actions we can perform on smart contracts –

  1. Sending notifications
  2. Releasing funds
  3. Approving a task
  4. Registering a vehicle
  5. Issuing a ticket, etc.

Here is how it would work in real life.

How smart contracts works
  1. Agreement – Discuss the agreement or type of agreement you want in the smart contract, also consider how many parties will be involved in the agreement. For example, in the case of a vending machine, only the customer and the vending machine are involved.
  2. Set Conditions – As smart contracts execute automatically, you need to set conditions that start the process of executions.
  3. Code Smart Contract – Once you are clear about the type of agreements and conditions that execute the smart contract, you can code it. For this, you need a web developer or blockchain developer.
  4. Deploying Blockchain – Once your smart contract program is ready, deploy it to the blockchain. Whenever such conditions are met in your blockchain, the code will be executed, and the program. For example, a flight delay insurance company will provide compensation to the customer if a flight gets delayed for 2 hours, if a flight gets delayed by 2 hours (the company’s blockchain has access to the airline’s database) funds will be released to the customer’s linked bank account.
  5. Execution – Once the smart contract is executed, all the nodes in the network will update their ledger. Once the record is verified and posted on the blockchain, it cannot be modified.

Real Applications of Smart Contracts

Following are some of the real-life applications of smart contracts technology.

Supply Chain Management

Supply Chain Management

The Supply Chain Management and Logistics industry requires daily management and auditing. However, with Blockchain and Smart Contracts these things can be automated, reducing the chances of human error.

Datahash is an agriculture supply chain platform that is using Hedera Consensus Service to thwart the $3 billion-a-year fraudulent wine market.

Insurance sector

Insurance Sector

The insurance sector is full of disputes due to lazy claims and payment processing. However, such problems can be solved with Smart Contracts by automating policies and services.

For example, an insurance company provides flight delay insurance, where if a flight is delayed by 2 hours, the passenger will get compensated. In that case, if these pre-determined conditions are met, compensation will automatically executed.

Voting System


Smart contracts and blockchain can provide secure and trustworthy voting. Where every vote is secured and encrypted, with this tech, we can automatically calculate the votes and declare the winner without third-party involvement.

Music Industry

Music Industry

Music artists depend on streaming income, however, it is hard to distribute profit between recording labels and artists. With smart contracts, artists and music labels can sign an agreement of a percentage of share in profit, and with the help of smart contracts, profit can be directly shared between two without any third party involvement.

Advantages of Smart Contracts

1. Automation & Speed

Sure, smart contracts increase automation by removing third parties or intermediaries. Hence, it provides smooth workflow and daily management.

Automation & Speed

2. Increases Trust

As the agreement will automatically be executed, the smart contract will increase trust between both parties. Businesses operating with smart contracts will be considered more trustworthy than businesses with traditional contracts.

Increases Trust

3. Security

Blockchain itself provides a lot of security to delete or edit a piece of information, hackers would need to alter the entire blockchain. Hence, smart contracts will be more secure than regular ones.


4. Cost Efficient

As smart contract eliminates third party or intermediary, they reduce various legal and formal cost of contracts and, hence its cost efficient.

Cost Efficient

Challenges of Smart Contracts

Difficult to regulate

1. Difficult to Regulate

There are some tasks or situations where human intervention is required, however as smart contracts automatically execute, they are difficult to regulate or oversee.

Complex Implementation

2. Complex Implementation

Implementing smart contracts in a blockchain is complex, as they are relatively new and still in the research phase.


3. Unchangeable

You cannot edit or re-code the smart contract, to edit the smart contract, the only option for you is to create a new smart contract.

History of Smart Contracts

Smart Contracts history isn’t long, in fact, it started a few decades back. Here are some of the major events –

In 1994 Computer Scientist Nick Szado defined smart contracts as a computerised protocol that can execute the terms of contract. He proposed this idea, however, at that time it seemed unrealistic due to fewer technological advancements. According to Szado, smart contracts can be used for payment settlements and other financial services.

Later on, Ethereum developed its blockchain having applications of smart contracts. This was another major event because more than 44 million smart contracts are running on the Ethereum blockchain.

Read about the history of blockchain 👉


As blockchain is becoming popular lot many research and developments are happening in this field. Learning about such tech makes you future-ready. In conclusion, we would say smart contracts are still in the development phase but they surely hold a bright future.

That’s it for this article, we hope you find it helpful.

Thanks for reading!


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