Hi Readers!

In today’s article, let’s go deep into what are smart contracts.

Imagine a system in which, to take a loan you have to enter the amount and give collateral and after verifying you’ll get the amount you desired while sitting in your home on your favourite chair. No need to go to banks, stand in a line and wait for approval.

This is now becoming a possibility with smart contracts. A smart contract is a computer program based on blockchain that allows you to do financial transaction without needing a third party like banks.

What are Smart Contracts?

A centralized system relies on a trusted third party like banks to do financial transactions between participants.

Unlike the centralized system where you have to rely on a third party, smart contracts are blockchain-based computer codes that can be self-executed and self-verified without needing much human intervention.

Smart contracts once executed on a blockchain cannot are impossible to change.

The terms and conditions mentioned in the smart contract will execute automatically when they meet the specified conditions.


The concept of smart contracts was first proposed in the 1990s by Nick Szabo. However, it didn’t get much attention as there was no platform or technology to execute smart contracts at that time

All this changed with the introduction of blockchain and Bitcoin.

Although, Bitcoin’s blockchain does not allow the creation of conditions that execute a transaction in a new block, as it only contains information on the transaction itself, the technology itself was crucial for the development of smart contracts

The development of protocols and codes for smart contracts has become popular after the introduction of Ethereum. Today, there are many platforms that allow you to use smart contracts, but Ethereum still remains one of the most widespread.

How Smart Contracts Work

Smart contracts are computer codes that are used to enter the terms of the contract between parties into the blockchain. The conditions are given in the form of “if-then”.

Let’s say, there’s an eCommerce store that uses smart contracts instead of banks to handle transactions. You order a smartphone from them, but instead of debiting the amount from your bank account, smart contracts will wait for the smartphone to be delivered to your address and then transfer the amount to the eCommerce store.

The contract itself is stored on a decentralized ledger and the information cannot be tampered with or deleted. The data is encrypted which assures anonymity.

Smart contracts can be currently linked with digital assets. Connecting the virtual and real-world is currently one of the primary focus in the development of smart contracts.


Smart contracts are really useful for a financial transaction without involving third parties. But there are various possible applications where smart contracts can be applied.

Let’s look at few more applications of a smart contract:

  • IoT Smart property: using smart contract nodes to share or give access to assets without requiring a third party e.g. Slock.it is a German company that is using eth based smart contracts to provide renting, selling or sharing anything without involving a third party
  • Music Rights Management: Smart contracts can be used to record ownership rights of music in the blockchain. A smart contract can enforce payment for music owners once their music is used Ujo is a company working on the use of smart contracts in the music industry.
  • E-commerce: Smart contracts can be used to facilitate trade between buyers and sellers. Payment can only be released to the seller once the buyer is satisfied with the product or service.
  • Smart contracts can also be used for E-voting, mortgage payment, digital right management, insurance, distributed file storage, identity management and supply chain.

Benefits of Smart Contracts

  • Speed: Processing takes a lot of time when humans are involved. Smart contracts are fast and efficient as they don’t require much human intervention, saving valuable time.
  • Independence: Smart contracts rule out the need for a third party to manage and guarantee transactions. The guarantee is taken by the code itself.
  • Reliable: Smart contracts once executed cannot be altered or changed so if one party does not complete the condition mentioned in the smart contract, the other party will be protected by the conditions of the smart contract.
  • Error Free Transactions: Since everything is automated and there’s very less or no human intervention involved, it ensures high accuracy and no payment delays.
  • Savings on Fees or Commission: Since smart contracts are eliminating the middlemen from the transaction. It reduces the operation cost as well as giving room for more advantageous terms for the parties involved

Disadvantages of Smart Contracts

  • Weak Legal Regulation: Smart contracts are being used for a very less period so due to the lack of understanding there are not many regulations implemented on its usage.
  • Difficulty in Implementing: Smart contracts require you to have knowledge of coding languages.
  • Changing a smart contract: Once a contract is deployed on the blockchain, it is impossible to change the conditions


Smart contracts have the true potential to change how we handle our daily transactions. They can handle transactions in a no-trust environment without requiring much human interaction or any third party to handle operations.

However, there are a lot of puzzles that need to be solved before using them at scale.

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