Smart Contracts: Explained

Elizabeth Wright
| Editor:
June 15, 2023
2 min read

What is a Contract?

Before deeply understanding the smart contracts, let’s remember the meaning of the term ‘contract’. A contract is a legally enforceable agreement between two or more parties.

What are Smart Contracts?

Smart Contracts (also self-executing contracts, blockchain contracts, digital contracts) is a digital form of agreement stored in the blockchain, automatically-executed without the participation of intermediaries when certain conditions are met. Initially, the idea of smart contracts was published by Nick Szabo in 1997 at the example of automated vending machines.

For Example, you need to buy a product with a specific characteristic, a particular color, and quality. It means conditions or rules beyond a simple cryptocurrency money transfer protocols can run. Smart contract addresses need specific validation for blockchain applications.

What it’s all about – pros and cons

The main idea of ​​smart contracts is to eliminate the interpretation discrepancy of the contract terms by the parties. Smart Contracts are making able to trust instead of using the judicial system.


  • agent neutrality;
  • automation, time-saving: excludes human participation in transactions, everything is done by the prescribed program code;
  • safety: data in the decentralized registry cannot be lost and cyber attacked;
  • precision: no mistakes can be made due to the absence of hand-filled forms;
  • standardization: a variety of smart contract types, the possibility to choose change according to needs.


  • Difficult to make corrections, it may bring mistakes into the system and make it less safe.
  • Human factor: perfectly and precisely code is needed.
  • Implementation costs: experienced coder not much cheap;
  • Uncertain legal status:
  • The new role of agents: programmers will need consultations for making new kinds of contracts.
  • Non-changeable terms encoded in the blockchain.

How does Smart Contracts work?

Smart contracts are based on blockchain technology the decentralized system of which allows users to manage transactions, transfer information, and material value without banks and intermediaries. Smart contracts follow only the instructions given to them. Between the nodes of the platform, the contract is distributed and copied multiple times. The contract is performed in accordance with the contract terms after the trigger happens. The program checks the implementation of the commitments automatically.

Still, the most common use of smart contracts is the simple transfer of cryptocurrency assets. But it’s possibilities wider:

  1. Healthcare (transfer or access to the health record, Medical Research, Track Health);
  2. Media (royalty payments to the artists following the criteria set in the contract);
  3. Public Sector (Public information can be sent to the parties asking for them);
  4. Cross-Industry (Product Provenance, Person-to-Person Transaction, Voting).

Future Potential

You can use smart contracts in everyday life situations, but its greatest potential is in the financial sector. Smart contracts help solve the problem of mistrust between parties and partners. For example:

  1. If company 1 sells a product to company 2 and both parties don’t trust each other, so in case of difficult situations, they will choose an arbitrary for helping.
  2. If company 1 sells through blockchain, only after company 2 pays money they will get the selling. It is possible to write in the code a transaction condition that will be transferred to the party after the money is deposited into the account. At first, the algorithm checks the balance and after the deal will be signed transaction.

Innovative or revolutionary, it is also commercially useful or capable of solving actual legal problems.

Smart Contracts – Future of Contracts

Why is it our future? Smart contracts are more flexible than a real contract, powerful feature, if properly designed and coded, will displace traditional legal contracts and improve the ability for two parties to ensure that contracts of all types can be better enforced and as a result in autonomous, efficient and transparent systems.

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