If you are interested in blockchain, you have certainly heard of smart contracts. Smart contracts are bits of software that manage the transfer of digital currencies or assets between parties after certain conditions have been met. It’s basically a digital agreement that does not need any intermediary because it executes itself based on its programmed values.

The contract takes the information provided as an input to which it assigns value by using the rules set in the contract and executing the clauses. These contracts run on blockchain technology, the underlying technology on which bitcoin and other cryptocurrencies are based.

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Smart contracts are like the blockchain version of an Application Programming Interface (API) for a usual web platform. An Application Programming Interface (API) enables user interaction with an application by employing a set of procedures.

What Smart Contracts Do

The smart contract is the link between the decentralized blockchain database and the front-end application, which is represented on the blockchain as a decentralized application (dApp). One dApp can have more than one smart contract which can be tasked to perform different functions to interact with the blockchain.

Smart contracts can be developed to be used for more than just transactions. These contracts can be used to make transactions in a variety of sectors, such as legal, insurance, real estate and much more.

How Smart Contracts Evolved

Nick Szabo, credited for putting the bases of cryptocurrency, was the first to propose the concept of smart contracts in 1994. When the concept first came out, there were no platforms that could support smart contracts, so obviously there was no interest for them.

In 2008, the first crypto coin ever was created- Bitcoin – and, along with it – blockchain technology. This new technology provided the right environment for smart contract code development.

At first, blockchain was mostly used for making transactions and creating new coins, but when Ethereum appeared onto the scene this all changed. Ethereum was the first blockchain platform to develop code specially made for dApp development.

This was the game changer that prompted the apparition of many other platforms, such as NEO and EOS. The growing popularity of blockchain technologies also attracted attention to smart contracts and their possible use cases, which in turn resulted in an expansion in dApp-based blockchains.

Smart Contract Applications and Blockchain

Blockchain is ideal for smart contracts as it can be stored in an immutable and secure environment. The data of a smart contract is encrypted on a shared ledger, which means that the information stored in the blocks can never be lost.

Also, by integrating blockchain technology into smart contracts, developers are not limited to storing only one type of data on a blockchain. In addition to flexibility for data types, they can also implement a wide variety of transaction options when they deploy the smart contract.

Smart Contract: The Inner Workings


A smart contract is able to function by itself, but it can also be deployed in tandem with other smart contracts. They can be programmed in a way that makes them depend on each other. For instance, a smart contract can be programmed to start only when another smart contract has been successfully executed and, after it completes itself, it can trigger another contract to start.

Theoretically, by only using smart contracts, you could run entire systems and organizations. This is applied to some degree to various cryptocurrency systems, where the governing conditions of the network are pre-defined, thing that makes it work autonomously and independently.

Smart Contract Objects

Every smart contract consists of three integral parts, which are also known as objects:

  • The first object is called signatories, which are the two or more parties that use the smart contract; they give their consent or disagreement regarding the proposed terms via digital signatures.
  • The second object represents the agreement’s subject. The existence of this object is limited only within the smart contract’s environment. Otherwise, the smart contracts would have to be able to freely access the object.
  • The third object of the smart contract are the specific terms. Based on these terms, the contract will execute itself. They have to be described in detailed mathematical terms and implemented in a programming language that is compatible with the smart contract’s blockchain.


To be able to exist, smart contracts are required to have a specific suitable environment in which they can operate. The first criterion of the environment is to support the use of public-key cryptography, which enables the signing off of transaction via the cryptographic codes that are uniquely generated for each user. This is the system which is used when accessing crypto funds from a wallet.

The second condition that has to be fulfilled is to have an open and decentralized database, to which all contract parties have access.  The database has to be trustworthy and fully automated.

Lastly, the smart contract’s inputted digital data has to come from a completely reliable source. This involves employing root SSL security certificates, HTTPS, and various protocols for secure connectivity.

Smart Contract Coding

Solidity is a programming language on which a smart contract is based and the native programming language of Ethereum, created in 2015. It has a syntax which bears similarities to that of JavaScript, and it was specially created to compile code for the Ethereum Virtual Machine.

The most convenient tool for smart contract development is considered to be Remix, an online IDE. You just copy the source code and paste it into Remix and the code should automatically be compiled.

The Advantages of Smart Contracts

Smart contracts provide their parties with a degree of trust and serve as a neutral agent when signing the deals. Also, as the process is automated, much time is saved as direct physical participation in transactions is not needed.

By being encrypted and distributed among nodes, the smart contract will not be lost or changed without permission. Another benefit is that most intermediaries are eliminated, as the user is the one making the contract.

A smart contract can have in-built security features as well. The system automatically generated backups and duplicates in case something might happen to the original one. Cryptography is what makes these documents highly secure. Hackers would have to dedicate a huge amount of time, effort and money to break them.

Smart contracts also increase speed and efficiencies as there is no more manual processing of paperwork involved.

The Disadvantages of Smart Contracts

However, smart contracts do come with some disadvantages. The novelty of this technology can make consumers be quite wary of it as they do not understand it yet.

Smart contracts are codes, and these codes are written by people. As such, there is a high chance of a smart contract code having many bugs because of human errors. Contrary to popular belief, coders are humans too, and they also make mistakes. Some mistakes, unfortunately, were very costly (see DAO incident).

If the data is already registered on the blockchain, it is very hard to make alterations. This may lead to more system errors and weaken security.

Another problem is that smart contracts do not have a clear legal status. Currently, there is no official governmental regulation which applies to them.

A lot of engineering expertise is required to make perfectly operational smart contracts. Experienced coders that fail-proof smart contracts and implement them in existing technology and processes are hard to find; and costly.

Even if you are a decent programmer, you cannot just make your own smart contract and use it for a real-estate deal. You would still need IT consultancy of some kind.

Final Thoughts

Smart contracts have the unlimited potential to change the way we make agreements and settlements. However, in spite of this, this technology is still in its development stage, and a lot more experience is needed. The problem with these contracts is that they can have bugs that can compromise an entire system. A very prominent example of that is the DAO hack in which funds were lost due to a code error in the smart contract that held the money.

Anyway, smart contracts are still a young technology, which in time can be perfected to serve us in ways we never imagined.

The Review



  • Enhanced Security
  • Economy and speed
  • No intermediaries
  • Wide variety of types of smart contracts that can be implemented for different tasks
  • Automated settlement
  • All information is immutable


  • Still a new technology
  • Lots of room for human errors in the coding process
  • Uncertain regulatory status
  • Costly to implement
  • Mistakes cannot be easily corrected

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