A person named Nick Szabo who was a legal scholar and a cryptographer most probably coined the term Smart Contracts in 1994. He had realized that it was possible to leverage the power of a decentralized ledger for creating smart contracts. But the question in many minds would still be there I guess that “What are smart contracts?”. However, it is terrific if you don’t have the question because that would mean I don’t have to write this post today. Lol. Nevermind moving forward.

So let’s begin with…

What are Smart Contracts

Smart contracts are programs or dapps, that function exactly as planned or rather programmed by its creators without any possibility of downtime, censorship, fraud or any third party interference. They are just like your mundane contracts. The only difference between a smart contract and a standard contract is that smart contracts make use of a cryptographic code for digitally facilitating, verifying or enforcing the negotiation or performance of a contract.

How do Smart contracts work

Before I begin, it’s imperative for you guys to understand that Bitcoin was the first cryptocurrency to implement the concept of smart contracts, i.e., one can transfer value in the form of digital currency from one person to another. Then after this its network of nodes/miners, etc. will only validate any transaction provided that certain conditions are met. However, bitcoin is just limited to the usage of currency.

On the contrary, Ethereum modifies bitcoins more restrictive language with its own language that is Turing complete ( i.e., it provides a wider scope for ciphering instructions ) known as “Solidity” that allows its developers to code programs a.k.a smart contracts in whatever way they want to.

So now that we have had a brief overview regarding smart contracts let us see how they work.

Smart contracts operate on an if this then that basis, i.e., “If X event happens then only, Y should happen.” Otherwise, nothing should get triggered just like if you don’t touch the first piece of the domino then the other parts would also stand still and vice-versa.

For example:- Let’s take a vending machine. You put money into the vending machine then press a specific button to order your snacks and beverage, etc. and then wait for it to fall and after it drops down, you enjoy it. Similarly, a smart contract gets coded in a way that if you are in need of a certain service like those a lawyer, then you would have to drop the required crypto coins into his account on the distributed ledger a.k.a blockchain and then presto get your documents delivered to you. Pretty cool. Eh?

Features of smart contracts

Autonomy – With smart contracts, you’re contracts/agreements are under your control because they eliminate the need for any middleman business. As a result of this feature danger of manipulation/corruption by third parties is greatly diminished since the implementation of these contracts is managed automatically by the network instead of a single authority/corporation who sometimes may not have your best interest at hand.

Trust – With the help of cryptography your precious documents are stored securely on a shared ledger. Therefore, it is next to impossible for anyone to claim that they lost it. Unless you lose your private key and have only yourself to blame.

Backup – Hypothetically speaking if your savings account gets hacked or robbed then wouldn’t that be terrible for you. However, on the blockchain, every one of your pals has got your back because your documents are duplicated several times.

Safety – Reiterating what I said earlier with the help of Cryptography, i.e., the encryption of websites your documents stored in a safe and sound manner on the blockchain. The fear of hacking is next to nothing. In fact, I doubt even Einstein would be able to crack the code and steal your belongings.

Speed – In case of the everyday documents you mostly need to spend a lot of time and paperwork for manually processing your documents. However, smart contracts employ software code for automating tasks that saves hours and hours of your precious time.

Savings – Smart contracts are healthy for your wallet because with them you don’t need to incur any exorbitant middleman fees.

Accuracy – Automated contracts are not only less costly and more efficient but also free from the mistakes that may happen from the manual filling of forms.

Smart-contracts are also capable of the following things

1). Operating as multi-signature accounts so that the funds of any project/venture cannot be released without the consensus of an absolute majority.

2). Administer agreement amongst users, for instance, one person opting to purchase insurance from another.

3). Providing utility to other contracts just like software libraries do.

4). Storing information regarding an application like domain registration or membership records, etc.

Explaining the last point even further, smart contracts are likely to need some help from other smart contracts.

When anyone places a fair bet regarding the temperature on a cooker of a day, it may initiate a sequence of contracts along with it.

One contract might make use of outside data for determining the weather, and a separate contract could settle the bet by using information it received from the first contract when all the required conditions are complied with.

Operating each contract needs transaction fees known as ether, which depends on the volume of computational resources required.

Implications of smart contracts

Apart from the benefits that I enlisted above smart contracts also have their fair share of problems such as buggy code, the reaction it received from the government because it is decentralized and that takes away their power which they lllllooooooooovvvveeee and mostly importantly the uncertainty regarding its safety because Ethereum has been hacked once during the DAO incident that leads to the formation of Ethereum classic.

Nevertheless, they are still pretty useful to many people including individuals, businesses, supply chains, etc.

Here is a list of specific areas, sectors, etc. that are looking to implement or may have already implemented smart contracts:

1). Governmental use;

There is unanimity( general agreement of people ) that while the digital voting system in the USA is pretty complicated to tamper with, it is believed that the Russian government may have hacked the voting mechanism 2016 US election.

So to counter this fear people can revert to smart contracts because they are firmly rooted as a security-based software. Also, by employing smart-contracts, it is pretty challenging to hack or manipulate the ledger-protected votes because that would require an exceptionally sharp mind and a lot of computing power which is next to impossible because that would mean that the person would have to defeat an entire network of computers that are situated all over the world. Even if someone or a group of people managed that, then the expenses would outweigh the rewards, and thus the entire effort would be pretty stupid in my opinion. As in who would want to work their hinny off for a loss at the end of it all.

Another case in point is that a voting application operating on a smart-contract basis would mean that people would no longer need to reveal their identity for filling out their voting forms. That, in my opinion, would make the process of voting a lot faster and convenient for other people resulting in an increased number of people looking to make their contribution in electing a representative for their nation which they hope and pray would lead their country to prosperity and a flourishing economy so that they can live a happy and satisfied life.


The single ledger feature of the blockchain acts as a source of trust ( since changes on one end would reflect on all the other aspects of the distributed ledger as well ). Besides that its features of transparency, security, accuracy, and autonomy would encourage improvement in the workflow and the way that communication happens within the organization. Normally speaking mundane business operations include a lot of back-and-forth activities while waiting for certain approvals and for dealing with both internal or external issues on a day to day basis. Therefore, a blockchain based ledger enhances the level of productivity within an organization, i.e., makes it more efficient. It also diminishes the level of disparity that mostly occurs with independent processing, and that could lead to expensive lawsuits and settlement delays which the heads of the particular organizations would most likely want to maintain a significant distance from.

Case Study

In 2015, the Depository Trust & Clearing Corp. (DTCC) used a blockchain ledger to process more than $1.5 quadrillion worth of securities, representing 345 million transactions.

3).Supply Chain

At the core of smart contracts is the If-Then premise which I had discussed earlier in this post. So a brief overview would be the domino effect as in if you touch one then the other dominos get knocked down. Otherwise, nothing happens. So its implication in the world of the supply chain is put forward by the founders of Bitcoin Core and the co-founder of bloqinc like this:

“UPS can execute contracts that say, ‘If I receive cash on delivery at this location in a developing, emerging market, then this other [product], many, many links up the supply chain, will trigger a supplier creating a new item since the existing item was just delivered in that developing market. All too often, paper-based systems where forms have to pass through numerous channels for approval hamper supply chains and increases exposure to loss and fraud. The blockchain nullifies this by offering a secure, accessible digital version to all parties on the chain and automates tasks and payment.”

Case Study

The Barclays Corporate Bank uses smart contracts for maintaining a record of the change of ownership and automatic transfer payments to other financial institutions.


Humankind has made a lot of progress in terms of the evolution from monkeys to super-smart robots. Imagine a future where everything that we do is mostly automated. Google’s inching towards this possibility on a daily basis through its innovative technologies like smartphones, smart glasses, smart cars, etc. This’s where smart contracts can prove to be pretty beneficial to humankind. An analogy is the self-parking vehicles, where smart contracts could play a pivotal role as in aid the concerned authorities in detecting who was at fault in a case of a car crash; the driver, the sensor or other innumerable other variables. By employing smart contracts, an automobile insurance firm could see through the driver’s backlog and accordingly decide the rate to charge a premium on.

5).Real Estate

Smart contracts make real estate deals more efficient and convenient. The standard procedure of renting out an apartment generally involves paying a middleman such as Craigslist or any other advertising platform some amount of money and then you’d need to spend some money on another person to make sure that the person who rented out your apartment kept up his end of the bargain. But a smart contract removes such complications from the process because all you need do is pay via any cryptocurrency that you possess and encode your contract into the ledger. Everyone is aware of this, and you get the automatic fulfillment of your side of the deal. Brokers, real estate agents, proprietors, and anyone involved in the property game can benefit from this.


With the help of blockchain technology, it is possible to encode and store personal health records by making use of a private key that would provide access only to specific individuals that are a part of the contract. The same methodology can be applied for making sure that the research is carried out according to the HIPAA laws (securely and confidentially). The receipts of surgeries could then be stored on a blockchain and automatically sent to insurance providers as proof-of-delivery. The ledger could also be used for general healthcare management like for the supervision of drugs, regulation compliance, testing results, and managing healthcare supplies.

So that is it for this post on how smart contracts work. As always if you have any questions then let me know in the comments section below. And please remember to follow us on Facebook, Twitter, Youtube, Instagram. Ok now bye guys, take care and have a nice day.

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About Author

I am a tech enthusiast & Digital nomad from Dhenkanal, India I've been dealing with Bitcoin since 2014.I started CoinGyan to help users around the globe to learn about popular Cryptocurrencies. Here at CoinGyan, I write about Bitcoin Wallet, Cryptocurrency wallets, & making money from Crypto.

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