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What is a Smart Contract?

Definition of a smart contract. How smart contracts work on the Blockchain. Examples of use and possibilities of smart contracts, the future of the technology.

A smart contract is a new method to conclude all types of transactions. Users no longer require banks or legal contracts since smart contracts combine both these functions. Moreover, the validity of transactions is verified by members of the Blockchain community. Information cannot disappear, be altered or lost. The relevance of the data remains for a specific date as long as the Blockchain network exists. The absence of a large number of intermediaries allows you to charge a minimum transaction fee or refuse it altogether. Also, the speed of operations ranges from seconds to several minutes. At the same time, there is no reference to the time of day or day of the week – this facilitates seamless international communication between users. Smart contracts can be used across various industries and have numerous applications, not only relevant to finance. In this article, you will find out what other projects this technology can be applied to.

What is a smart contract on the Blockchain?

We felt it necessary to provide a beginner's guide to smart contracts offering general explanation of the principles of this algorithm. A smart contract is a digital protocol that operates in the Blockchain field. The principle of operation of all smart contracts is identical. But depending on the community, details may change. This algorithm is designed to simplify, verify, and conclude a transaction. You can also eliminate the stages of due diligence and negotiations. A deal can be carried out automatically if all conditions are met on both sides.

One of the goals of Blockchain development was to get rid of third parties when making deals. Working directly leads to increased speed and lower fees. The pioneers in this area were members of the crypto community and traders. Now, even government agencies and banks have started using Blockchain to keep up with speed and deliver quality services. Also of particular value is the security of the protocol. The Blockchain itself is protected by community members, since every transaction needs to be confirmed by one or more users. Strong decentralisation ensures the security and fairness of the distribution ledger. Another plus is the elimination of human errors when conducting a transaction or entering data. All information is verified by an electronic protocol.

What do you need to know?

If you are interested in how a smart contract can be useful to you, then this technology can be applied to any area of ​​life. Anyone can virtually exchange whatever they want without leaving home. You can choose to work with money, stocks or real estate. Government organisations have implemented smart contracts in real estate transactions, electronic renewal of drug prescriptions, and registration of cars belonging to new owners for example. Each deal is characterised by the following:

  1. There are no fees or the fees are minimal for checking the validity of transactions.
  2. No intermediaries are involved.
  3. Complete transparency.

In simple terms, a smart contract can be explained as a vending machine with food and drinks. The buyer selects the desired product, pays and automatically receives his product. The same result is provided by Blockchain, but on a more global scale.

How do smart contracts work?

Vitalik Buterin, a developer of the Ethereum community and cryptocurrency, was the first to introduce the smart contract technology. He explained the principle of the technology through the purchase of real estate without the participation of third parties. The stages of making a deal look like this:

  • One person wishes to rent a house and finds an offer within their budget;

  • The tenant sends the cryptocurrency to the specified public key (address);

  • The program automatically checks the compliance of all conditions (in this case, whether enough funds were transferred);

  • If there are insufficient funds, the smart contract will not be signed, and the crypto coins will be returned to the owner;

  • If funds are sufficient, the smart contract is concluded and approved by network users;

  • The tenant can receive an electronic receipt of payment and print it.

The Distribution Registry stores all information as long as this Blockchain exists. It will not be possible to make changes to these payments and receipts in the future to avoid fraud. By the way, if we are talking about renting, not buying real estate, then once the lease expires, the transaction will be canceled automatically. The same occurs if the owner of the apartment increases the rent and the payment conditions are no longer met.

Smart contracts prove to be useful in the areas of insurance, development of financial instruments, legal processes and crowdfunding agreements.

Examples of using smart contracts

The more cryptocurrencies appear, the more developers are trying to unify them using various add-ons and multifunctional ecosystems. In complex ecosystems, transactions slow down, therefore, new tokens are emerging to speed up the exchange of data. But often, security is compromised since verification takes place based on a simplified model. The Ripple team is actively working in this direction. 

Smart contract features

The implementation of smart contracts has proven to be extremely beneficial for all sectors and industries. Here are just a few areas for which automation has become a new stage in their evolution:

  • Conducting presidential or parliamentary elections, as well as automatic vote counting. In this case, errors in the registration of ballots and falsification of results are avoided. The same can be implemented when shareholders of an enterprise vote.

  • Enterprise management becomes easy and transparent. Reports on the work of each department are available in real time. Also, data on currency rate fluctuations or price changes are automatically transmitted to the system.

  • Some countries, such as Estonia, were the first to introduce Blockchain and smart contracts into the national healthcare system. This makes it possible to store and maintain patient cards, and also to automatically renew or close sick leave certificates, as well as to issue prescriptions for medicines.

  • Logistics is another area that urgently requires improved automation. Deliveries are easy to track in real time. The algorithm transmits data for shipment to the enterprise system as soon as the receipt of payment is confirmed. Banks are excluded from this process, so there are no time delays or high fees.

The future of smart contracts

The introduction of smart contracts in different areas of human life requires changes in workflows and business processes. All legal documents must be transferred from paper to the Blockchain protocol. It is also necessary to carry out extensive work on entering documents from numerous electronic databases into a single one. And the most difficult thing is to choose a Blockchain that will be considered universal. If different companies or countries use different algorithms, an additional add-on will be required to enable collaboration.

Smart contracts will be very useful in the field of accounting and for regulatory authorities. The audit of various operations and the correctness of the workflow can be carried out in real time. At the same time, employees do not need to understand the intricacies of cryptography. It is enough to automate all processes once and enter the necessary data and conditions for fulfilling the contract. Control takes place in automatic mode. Reports can also be generated and sent to reviewers upon request or at regular intervals.

Bitcoin smart contracts

Smart contracts are ideal for making transactions with Bitcoin. Many netizens pay for goods or services in Bitcoin. Smart contracts will allow you to fully automate trade, as well as the service sector. At the same time, there are currently some difficulties with document processing. This is due to the fact that the cryptocurrency industry is still in its early stages of development. Integration into other areas is happening gradually.

The Bitcoin network, such as Ethereum, supports several types of smart contracts. This feature of the Bitcoin Blockchain is less popular but can be very useful. The main condition for signing such a smart contract is the approval of the transaction by several community members. The reliability of this method is very high. Until now, the problem has been that Bitcoin smart contracts are either executed immediately, as they meet all conditions, or none. This has been a deterrent to increase popularity.

Bitcoin member, Jeremy Rubin, is trying to solve this problem with the new programming language, Sapio. The introduction of a new type of smart contracts, on the one hand, will increase the reliability of transactions, on the other hand, more complex smart contacts will become available. They will be characterised by a large number of conditions and time delays. The language is based on the CHECKTEMPLATEVERIFY (CTV) protocol. The developer envisages the main areas of application to be for:

  • Reliable storage of Bitcoins.

  • Modernisation of the judicial system through the availability of independent private arbitration.


The potential of smart contracts to improve society is enormous. This is what will provide the technical basis for large-scale social change. People should not be afraid to implement new developments, as in this case, errors associated with fatigue or employee incompetence in various fields will disappear from everyday life.