Crypto Beginner

What are Smart Contracts?

What is a Smart Contract

Key Takeaways

  • Nick Szabo first proposed the idea of smart contracts in 1994.
  • Smart contracts are essential in securing transactions, reducing costs, and eliminating the need for third parties.
  • Smart contracts have three major properties: Autonomy, decentralization, and auto sufficiency.

When we hear the word “contract,” most of us immediately picture lawyers and binding documents. But of late, contracts have evolved – Smart Contracts. Adopting technological capabilities, they have become “smart.”

The term “smart contract” describes a relatively new concept in blockchain technology, and most of us have many questions about it. Here’s an attempt at answering some of them.

What are Smart contracts, in Simple Terms?

Nick Szabo first proposed the idea of a smart contract in 1994. He defined them as “sets of promises specified in digital format.” In his vision, smart contracts would transform the potential of electronic transactions by making them completely digital. Today, Szabo’s dream has become a reality thanks to blockchain codes.

A “smart contract” is program which runs on a blockchain network to execute an agreement when all its terms are met.

Smart contracts make it possible for transactions to be executed without the involvement of third parties. They use coding as a substitute for third parties. In that sense, they are automatic and self-executing.

Why are smart contracts so important?

On a blockchain, smart contracts play a vital role in securing transactions, reducing costs, and eliminating the need for third parties. The parties of the transaction set up the protocols or rules that govern it.

For example, one party can complete a task, while the other promises to pay a certain amount for the service. Smart contracts are one step toward guaranteeing that both parties will meet the contract’s terms, which are secured against attempts to tamper or alter them at a later point in time.

Intelligent contracts are valuable since they reduce transaction costs by eliminating a third party, such as a bank, that might charge fees. The functions of smart contracts have made virtual or digital transactions a viable alternative to traditional contracts.

How do smart contracts work in Blockchain?

Simply put, smart contracts work when “if…then…” statements are written into code. What does this mean? Well, when a smart contract is formed, the participants start by determining how their data and transactions will be represented on the blockchain. They agree to accept some rules governing the transaction, any exceptions, and how disputes will be resolved. Once they agree, the “if/when…then…” statements are added, and the contract is prepared on the blockchain network.

To develop a smart contract, participants might rely on the services of a developer. Other ways include using templates, web interfaces, and online tools that help structure smart contracts.

Key properties of smart contracts

Smart contracts have three major properties:

  • Autonomy: Smart contracts can function and execute tasks without human control.
  • Decentralization: Smart contracts don’t require intermediaries.
  • Auto sufficiency: Smart contracts operate automatically.

Benefits of smart contracts

There are many benefits of smart contracts, here are a few:


Blockchain networks support smart contracts. All data on these networks are encrypted and accessed using keys held by the participants. The exclusive access to transaction data and the lack of intermediaries make smart contracts very transparent and trustworthy.


Smart contracts benefit from the use of a blockchain’s distributed ledger. Whatever is on the records is protected from hackers and other malicious actors, as nobody can change it.

Lower transaction fees

Smart contracts eliminate intermediaries. This means most fees associated with traditional transactions are done away with. Third parties like banks, which usually charge processing fees, are replaced by the smart contract.

Speed and efficiency

Smart contracts have no use for paperwork. Digitization makes sure that the transactions are error-free and ready to process. That reduces lags in contract execution.

Limitations of smart contracts

Tough to make changes

After a smart contract is established, it’s almost impossible to fix any errors that might be discovered. Addressing such errors can be laborious and amending them expensive.

No protection of parties

The elimination of third parties is largely seen as an advantage, but it exposes participants to risks. Some parties can choose not to adhere to the good faith concept.

A third party is necessary

Smart contracts eliminate most intermediaries like banks or governments, but some third parties are necessary. Parties might need a developer to create codes for smart contracts. In big contracts, a lawyer might also be necessary to help participants understand the terms of the agreement.

Smart contract examples and uses?

Since smart contracts are autonomous, decentralized, and self-sufficient, they can come in handy in various industries. These are also the types of smart contracts on the blockchain. Some popular use cases of smart contracts include:

Supply chain management

Supply chain management involves overseeing the flow of goods—from the manufacturer to the user. Smart contracts can be useful in supply chain management as they can automate the recording of entries and release of payments.


Processing claims speedily is a perennial challenge the insurance industry faces. Smart contracts allow the insured and insurer to initiate the claims process immediately. Both parties, and their representatives, can easily add information to settle a claim.


In the healthcare industry, smart contracts can help synchronize workflows and ensure timely delivery by eliminating manual processes. In addition, they also make it possible to pull out medical records easily whenever authorization is necessary. That makes healthcare delivery faster and more accurate.

The future of smart contracts

Technology experts predict that the future is bright for smart contracts, especially with the mainstream adoption of blockchain technology. As more companies adopt blockchain technology, smart contracts will become a significant mode of interaction.

There are many advantages of smart contracts. They will automate transactions to make instantaneous business operations on local and international markets possible.


What is a smart contract in simple terms?

A smart contract is a self-executing contract with the terms of the agreement between parties directly written into code.

What are examples of smart contracts?

Examples of smart contracts include non-fungible tokens (NFTs) for verifying ownership, automated insurance payouts, and supply chain management.

What is a smart contract type of blockchain?

A smart contract operates on a blockchain, a distributed ledger technology that ensures transparency, security, and immutability of the contract’s execution.

What are the 4 major parts of a smart contract?

The four major parts of a smart contract include the preamble, the parties involved, the terms and conditions, and the execution instructions.

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