What are Smart Contracts? Beginner’s guide to Smart Contract

What are Smart Contracts?

A contract in the traditional sense is a binding agreement between two or more parties to do or not do something. Each party must trust the other party to fulfill its side of the obligation.

Smart contracts feature the same kind of agreement to act or not act, but they remove the need for the trusted third party between members of the contract. This is because a smart contract is both defined by the computer code and executed or enforced by the code itself, automatically without discretion. There are three key elements that distinguish smart contracts from traditional contracts: Autonomy, Self-sufficiency and Decentralization.

  • Autonomy: Once a smart contract is launched and running, it does not need to be in further contact with its initiating agent.
  • Self-sufficiency: A smart contract could raise funds by providing services or issuing equity and could spend them on needed resources, such as processing power storage.
  • Decentralization: Smart contracts are registered into blockchains and are thus distributed and self-executed across a wide network of nodes.

The classic example used to demonstrate smart contracts in the form of code executing automatically is a vending machine. Unlike a person, a vending machine behaves algorithmically; the same instruction set will be followed every time in every case. When you deposit money and make a selection, the item is released. There is no possibility of the machine not feeling like complying with the contract today, or only partially complying (as long as it is not broken). A smart contract similarly cannot help but execute the prespecified code. As Lessig reminds us, “code is law” in the sense that the code will execute no matter what.


Smart contracts were first proposed by an American computer scientist and cryptographer – Nick Szabo in 1994. He realized that the decentralized ledger could be used for smart contracts, otherwise called self-executing contracts, blockchain contracts, or digital contracts.

However, at that time, there was not enough infrastructure to materialize that.

But, everything has changed with the advent of Blockchain technology.

Bitcoin laid the foundation for creating smart contracts on Blockchain. However, it still cannot satisfy all requirements. It was not until 2013 that Ethereum emerged, Ethereum blockchain network made it possible to employ them.

How do Smart Contracts work?

Byzantine fault-tolerant algorithms allowed digital security through decentralization to form smart contracts. Additionally, the programming languages with various degrees of Turing-completeness as a built-in feature of some blockchains make the creation of custom sophisticated logic possible.

Notable examples of implementation of smart contracts include the following:

  • Bitcoin provides a Turing-incomplete Script language that allows the creation of custom smart contracts on top of Bitcoin like multisignature accounts, payment channels, escrows, time locks, atomic cross-chain trading, oracles, or multi-party lottery with no operator.
  • Ethereum implements a nearly Turing-complete language on its blockchain, a prominent smart contract framework.
  • Ripple (Codius), smart contract development halted in 2015

A Smart Contract Example

Here is the code for a basic smart contract that was written on the Ethereum blockchain. Contracts can be encoded on any blockchain, but Ethereum is mostly used since it gives unlimited processing capability.

An example smart contract on Ethereum. Source: https://www.ethereum.org/token

The contract stipulates that the creator of the contract be given 10,000 BTCS (i.e. bitcoins); it allows anyone with enough balance to distribute these BTCs to others.


Applications Of Smart Contracts


Insiders vouch that it is extremely hard for our voting system to be rigged, but nonetheless, smart contracts would allay all concerns by providing an infinitely more secure system. Ledger-protected votes would need to be decoded and require excessive computing power to access. No one has that much computing power, so it would need God to hack the system! Secondly, smart contracts could hike low voter turnout. Much of the inertia comes from a fumbling system that includes lining up, showing your identity, and completing forms. With smart contracts, volunteers can transfer voting online and millennials will turn out en masse to vote for their Potus.


The blockchain not only provides a single ledger as a source of trust, but also shaves possible snarls in communication and workflow because of its accuracy, transparency, and automated system. Ordinarily, business operations have to endure a back-and-forth, while waiting for approvals and for internal or external issues to sort themselves out. A blockchain ledger streamlines this. It also cuts out discrepancies that typically occur with independent processing and that may lead to costly lawsuits and settlement delays.


There’s no doubt that we’re progressing from slothful pre-human vertebrates to super-smart robots. Think of a future where everything is automated. Google’s getting there with smartphones, smart glasses, and even smart cars. That’s where smart contracts help. One example is the self-autonomous or self-parking vehicles, where smart contracts could put into play a sort of ‘oracle’ that could detect who was at fault in a crash; the sensor or the driver, as well as countless other variables.  Using smart contracts, an automobile insurance company could charge rates differently based on where, and under which, conditions customers are operating their vehicles.


Personal health records could be encoded and stored on the blockchain with a private key which would grant access only to specific individuals. The same strategy could be used to ensure that research is conducted via HIPAA laws (in a secure and confidential way). Receipts of surgeries could be stored on a blockchain and automatically sent to insurance providers as proof-of-delivery. The ledger, too, could be used for general healthcare management, such as supervising drugs, regulation compliance, testing results, and managing healthcare supplies. (Blockgeeks)

Advantages and Disadvantages of Smart Contracts


Smart contracts use all the benefits of Blockchain technology.

Smart contracts provide:

  • Security: The smart contract is encrypted and distributed among nodes. This guarantees that it will not be lost or changed without your permission.
  • Economy and speed: Most processes are automated, and most intermediaries are eliminated.
  • Standardization: There is a wide range of different types of smart contracts nowadays. You can choose one and change it according to your needs.


Smart contracts are not that perfect, after all.

Here are some of the issues smart contracts might have:

  • Human factor: The code is written by people, and they can make mistakes. If the smart contract is in the Blockchain, it couldn’t be changed. A good example of the human error is The DAO. Developers’ mistakes in the code were costly for the users and the company – some hackers exploited errors and stole about $60 mln.
  • Uncertain legal status: Currently, smart contracts are not regulated by any government. So there is a potential issue if governmental institutions decide to make a legislative framework for smart contracts.
  • Implementation costs: Smart contracts cannot be performed without programming. It is essential to have an experienced coder on the staff to make fail-proof smart contracts and adopt the internal structure of the company for Blockchain technology.

Blockchains Where You Can Process Smart Contracts

  • Bitcoin: Bitcoin is great for processing Bitcoin transactions, but has limited ability for processing documents.
  • Side Chains: This is another name for blockchains that run adjacent to Bitcoin and offer more scope for processing contracts.
  • NXT: NXT is a public blockchain platform that contains a limited selection of templates for smart contracts. You have to use what is given; you’re unable to code your own.
  • Ethereum: Ethereum is a public blockchain platform and the most advanced for coding and processing smart contracts. You can code whatever you wish but would have to pay for computing power with “ETH” tokens. (Blockgeeks)

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