What Are Smart Contracts? – A Detailed Guide

What Are Smart Contracts? - A Detailed Guide

Digitalization and automatic processes have changed the world.

Everything we do nowadays incorporates technology. To make our life easier, a lot of technologies use automation. Automation is one of the main features of smart contracts that are used in the blockchain.

Contracts are agreements between two parties on a set of conditions. Generally, they are written and signed on paper. On the other hand, a smart contract is an automated process inside the blockchain, which happens once the requirements are met. 

What Are Smart Contracts? 

Smart contracts are a self-executing process used to hold an agreement between two parties. From within, they have terms and conditions that should be met. Instructions in smart contracts are written in the form of code. For the contract to occur, the parties should use a digital code. 

They are used to perform business logic and exchange assets, money, property, and other tasks without needing intermediates. They are deployed on the blockchain. Hence no third party, such as banks, entities, or governments, maintains them. Eliminating third parties in this technology reduces time, fees, and conflicts, and it is a faster and more efficient process.

Once an agreement is executed, smart contracts are stored on the blockchain. For a contract to be considered executed, the transactions should be successful, and the conditions in the code should be met.

Main Features of Smart Contracts

Some of the key features that characterize smart contracts are: 

No Third-party Involvement

A smart contract has an automatic process that does not require an intermediary. Banks, entities, governments, or states are not involved in the contracts. It eliminates the risk of manipulation, and it reduces costs. 


A smart contract is transparent and conflict-free, its data is encrypted and shared among participants in the blockchain. Everyone has access to the terms and conditions of a contract, and once the contract is signed, the parties involved are held accountable. It ensures transparency and trust in the blockchain. Even though they are transparent, smart contracts are secure via cryptography, and no information can be leaked. 


Smart contracts are programmed to work automatically. They self-execute if the terms in the agreement are met. Its advantage is that it removes the need for manual involvement and eliminates errors due to the automatic filling of forms. It creates security, efficiency, and accuracy. 

Decentralized Arbitration

Smart contracts are deployed on the blockchain. If there is any disagreement between parties, the arbitration will resolve disputes between parties without the use of a traditional legal system. The arbitration will use evidence and arguments from both parties and automatically decide who the winning party is. 

How Were Smart Contracts Created? 

American cryptographer and programmer Nick Szabo established the idea of smart contracts two decades ago. He also invented a cryptocurrency called Bit Gold but never actually launched it. According to him, smart contracts are protocols that use mathematical algorithms to execute transactions. With the establishment of smart contracts, he aimed to improve highly evolved contract law for internet users. 

Even though the first smart contract was invented in 1994, it became prominent in the world of technology when Bitcoin appeared in 2008. Blockchain technology allows decentralized and trusted networks that do not need authority to carry out contracts. 

The first blockchain platform that allowed smart contracts was Ethereum, and currently, it’s the dominating platform. Smart contracts in Ethereum are used for more than just transactions. They regulate services that Ethereum provides, such as: running and launching decentralized applications (dApps) and decentralized finance (DeFi), etc. 

How Do Smart Contracts Work? 

A smart contract has a code that automatically follows instructions and executes them. The contractual parties agree on the terms and conditions. Then those terms are translated into a code and programmed. In this code every possible scenario for a particular transaction is set. The code is stored on the blockchain network, and it replicates itself. The transaction occurs when every computer has the code, and all participants verify the terms.  

The code of a smart contract is designed to perform a specific action when a particular criterion is met. Developers cannot write complex smart contracts that can perform complex actions. Currently, they can execute two types of transactions:

  1. Ensuring payments of funds when events occur.
  2. Paying financial fees if the conditions of the contract do not met.

Once the contract is set, there is no more need for human intervention in either of the scenarios. It makes the process automatic, and it reduces human labor.

We use smart contracts to work for the masses, replace government mandates in retail transactions, and much more benefits. In addition, they will eliminate the need for inevitable disagreements to be heard in courts. It will save the parties time and money. The code within the contracts is the reason that they are secure and trustable. 

Use Cases

Many important sectors are adopting Blockchain every day. We listed some of the industries that use smart contracts below. 

Real Estate

In the future, if you decide to buy real estate with a blockchain platform, you will see smart contracts in action. There are parameters such as loan amounts, installment time, and other unique conditions that you must consider. Both parties should agree upon the parameters and once they fulfill the requirements, they should sign the smart contract to set it into motion. The property transfers to the buyer once the payment is complete. And this deal closes in a shorter time with fewer fees. If any event occurs, all the parties involved will be contacted automatically. 

Healthcare And Medication

With the help of a private key, you can store data in the blockchain for every patient’s medical condition, and only authorized people can access it. Moreover, hospitals can share data, such as patient receipts, directly with insurance companies. The distributed ledger can also be used in the healthcare sector to monitor drugs, manage suppliers, and enforce compliance. In addition, if you have to wear a health-tracking bracelet, it will record your blood pressure and heart rates in the blockchain. And if anything goes wrong, you will be notified through smart contracts. 

Banking Services

In the case of insurance claims, banks can check errors, routing, and transfer payments automatically with the help of smart contracts. Also, they can keep track of transactions and accounts without worrying about data manipulation. Once we calculate the amounts trade will be easier, and the money will instantly transfer to the person’s account with no fees. 

Supply Chain And Inventory Management

Traditionally every form in the supply chain is paper-based, and the opportunities for fraud are significant. But, smart contracts eliminate these risks because they can successfully deliver the information in a digital version directly to the parties involved in the supply chain. We can also use them to manage stocks and automated payments. Managers can see real-time stock levels and how long it will take to move that stock in the warehouse or delivered to the client.


There are a lot of games online that you can play to generate money. They come with different offers, and if you want to organize your data, smart contracts will do it for you. They will keep track of your payments and how much money you are winning. 

Future of Smart Contracts

The use of smart contract has a bright future as the world becomes more aware of the numerous benefits decentralized systems offer. Platforms and industries will use smart contracts to regulate their networks, and in the future they will eliminate their minor flaws. 

There is a long way until smart contracts will govern everything, but undoubtedly, they are the way forward and will replace traditional paper-based contracts completely. They will save the world time and money and revolutionize customer interactions. We are already testing and using them in real life, and it will be a short time until we will have to encounter them every day.


  • A smart contract is an automated processes that blockchain uses to create agreements between two parties on a set of conditions.
  • They are self-executing processes with agreements between two parties and instructions written in a code. 
  • Its main features: no third-party involvement, transparency, self-execution, and decentralized arbitration.
  • Nick Szabo invented smart contracts two decades ago to improve contract law for internet users. 
  • A smart contract has a code that automatically follows instructions and executes them. 
  • Different sectors, such as real estate, healthcare, medication, and gaming, are adopting smart contracts.  
  • Smart contracts will replace traditional paper-based contracts, save time and money, and revolutionize customer interactions.

About Dren Hima

Being exposed to the crypto industry for the last few years has given me valuable experience with market analyses (technical and fundamental) as well as blockchain technology in general. As the content editor and a market analyst of Walletor, I strive to share the latest developments of the crypto industry, while also providing a unique educational experience for all Crypto & FinTech enthusiasts.