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In Crypto Last updated: August 3, 2023
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Smart Contracts are known to be the base of the blockchain platform for performing different operations.

The technical definitions are always a bit difficult to understand. Let us first try to understand more about smart contracts with the help of a basic example.

Imagine a scenario of a person trying to purchase anything from a vending machine. Here, the buyer puts in the coin and presses the button of the required item. Now, the candy or the item whose button is pressed will be pushed out of the machine through the lever.

If you notice, there was no requirement of any cashier. A smart contract works in a similar manner. There is no need to pay extra fees to an intermediary due to the implementation of smart contracts.

Now, let us understand the technical meaning of smart contracts.

What are Smart Contracts?

Smart contracts are self-executing protocols that contain various instructions as well as terms and conditions within them. These contracts are executed on the decentralized platform of the Ethereum blockchain. All the instructions are written in the form of a code.

The terms and conditions of any smart contract are similar to that of traditional contracts. They contain different rules, regulations, and conditions when specific actions have to be performed. There is no person or entity to maintain these smart contracts. Instead, they are simply deployed on the blockchain network and run as programmed.

Two hands holding a laptop displaying smart contracts.

Smart contracts function in different ways, resulting in the exchange of property, assets, data manipulation, and much more on the blockchain network.

Earlier, a trusted third party executed the agreement between the two parties. Now, the scenario has changed with technology upliftment. They can automate this entire procedure and also eliminate manual labor.

The primary function of a smart contract is to programmatically perform business logic and execute various tasks or processes by responding to a different set of conditions.

History of Smart Contracts

Nick Szabo, an American cryptographer and programmer, first came up with smart contracts in 1996. This happened a long time, even before blockchain technology came into existence. According to him, smart contracts are digital protocols that use mathematical algorithms to execute a particular transaction when certain pre-defined conditions are met.


Bitcoin was the first cryptocurrency that appeared in 2008. It was based on blockchain technology. This was when the development of smart contracts became prominent in the technology world. After five years, the Ethereum platform had made it possible to use smart contracts.

Currently, there are plenty of platforms providing the usage of smart contracts, but nothing can overtake Ethereum.

Now, let us understand a bit about the working and functioning of these contracts.

Example of a Smart Contract

There are numerous examples of smart contracts, such as peer-to-peer transactions, product development, supply chain management, stocktaking, etc.

Below are some examples of Smart contracts:

  • Decentralized exchanges (DEXs) enable cryptocurrency trading without intermediaries through automated smart contracts.
  • Smart contracts are used in many DeFi (Decentralized finance) applications, such as lending, borrowing, and trading.
  • Web3 economy enables smart contracts for creators, promoting transparency and fan loyalty. Artists tokenize work as NFTs, selling on the secondary market. Smart contracts distribute royalties automatically when new transactions occur, ensuring creators benefit from their work’s value.
  • Smart contracts improve claim processing in the insurance industry, reducing costs for consumers by minimizing fraud and speeding up administration.
  • Smart contracts reduce expensive errors in trade finance by automating workflows and improving calculations, thereby reducing work hours.
  • Real estate utilizes smart contracts to track property ownership, enhancing transaction efficiency and eliminating intermediaries like lawyers and brokers.
  • Healthcare institutions use blockchain for secure automation. Hospitals face data breaches, but blockchain ensures the secure sharing of patient data among providers using smart contracts.
  • E-signatures simplified document processing, eliminating paper and delay. Smart contracts offer a similar revolution by enabling automated agreements triggered by events, saving money and accelerating processes for businesses.
  • Smart contracts are a cutting-edge technology that could revolutionize many industries. With further development, the potential steadily increases and is likely to continue growing in the future.

Smart contracts are a cutting-edge technology that could revolutionize many industries in the future.

How do Smart Contracts work?

Smart contracts consist of code that can automatically follow a set of instructions and execute them. They are stored on different blockchain platforms. Now, let us get to the basics of its functioning.

Firstly, the terms of the smart contract are finalized by both contractual parties. Once the terms are finalized, all those instructions are translated into code and programmed. This code consists of different conditional statements that will describe all the possible scenarios for a particular transaction in the future.


The created code is stored as well as replicated among all the participants of the blockchain network. Now, all the computers in the network will execute the provided code. Only if all the participants verify the code and the contract terms are satisfied will the transaction occur.

The code of smart contracts is developed in such a way to perform certain actions when a particular criterion is met. It is not possible for the developers to code complex smart contracts and allow them to perform complex actions. Currently, we can expect them to execute automatically two types of transactions:

  1. Ensuring the payment of funds when certain events are triggered
  2. When certain objective conditions are not satisfied, then the party has to pay financial penalties.

Once a successful contract is deployed, there is no need for human intervention for both scenarios. This reduces human labor and also automates the entire process without any chance of errors.

Applications of Smart Contracts

There are a wide array of applications of smart contracts in different sectors. Even when it has not completely evolved, there are still several applications of smart contracts in various sectors, from financial services to healthcare. These applications are going to increase to a massive extent as and when blockchain and smart contracts evolve.

Let us have a look at some of the key applications.

Healthcare and Medication

The main functionality of smart contracts is visible in the healthcare sector. The health records of every patient can be stored with the help of a private key in the blockchain. Only certain authorized personnel should be allowed to access that data. On top of that, smart contracts can also help out in performing research confidentially.

The receipts of patients can be stored on the blockchain network, and the hospitals can even share them directly with the insurance companies as proof of records. Other than that, healthcare sectors can also utilize the distributed ledger to supervise drugs, manage supplies, and regulate compliance.

Another significant benefit of smart contracts can be seen in medication. For instance, if you are wearing a health tracking bracelet, it would register all your blood pressure and heart rate details. If this data is being transferred directly to a blockchain network, you will immediately receive a notification through the smart contract if any parameter crosses the line.

You will be warned if anything wrong can happen to you. This is the most effective application of smart contracts as they can even save a person’s life.

Banking Services

Traditional banking services can be transformed in multiple ways through the use of smart contracts and blockchain technology. If we consider the scenario of insurance claims, the banks can directly perform error checking, routing, and transfer payments to the party directly in their bank if everything looks appropriate.

Keeping a record of all the transactions and accounts can be very much simplified through smart contracts. There won’t be any issues of data infiltration. On top of that, the shareholders can even participate in decision-making transparently.

Financial Services

Trade clearing is simplified because once the amounts of trade settlements are calculated, all the funds can be directly transferred to the person’s account.

Other than that, there is no need to wait for a few days for your money to be transferred. With the help of smart contracts, you can perform instant money transfers with no fees. With no involvement of a third party, the transactions are pretty cheap as well as fast.

Smart contracts can make it easy to maintain all the tax records without any chances of cheating. People often forget about paying taxes and later on have to pay fines. With the help of smart contracts, tax payments can be automated, and late fees can be avoided entirely. All the data about tax payments is visible on the blockchain network with complete transparency.

Supply Chain and Inventory Management

In the traditional supply chain, everything suffered a lot because of the paper-based system. Every single form had to pass through various channels to get approvals. In this trying scenario, there are plenty of chances of fraud as well as loss.

supply chain

With the use of blockchain and smart contracts, all these risks can be nullified. Blockchain is successful in delivering a secure as well as an accessible digital version to all the respective parties that are involved in the supply chain. Smart contracts can even turn out to be helpful in managing the inventory and automating payments as well as tasks.

Managers will be able to see real-time stock levels, and the time it will take to move those products in big warehouses with the help of smart contracts. Delivery times can be improved and made more efficient by analyzing everything.

If a supply chain operates in multiple locations, smart contracts can also make automatic reorders and make automatic payments for the received orders. This data can also be used to know the busiest time for any warehouse and how the companies can improve in that area. Other than that, companies will even know which products to stock at different times of the year with clear records available on the blockchain network.

Virtual Gaming 

There are plenty of options to play online games where you can play and win real money. There are plenty of virtual gaming sites with different offers. If you are playing just for fun with no real money involved, you won’t have to think about anything. But, if you are playing with real money, you need to start thinking about payments and ways to get your winnings.

online gaming

They will ensure that all your payments and earnings are clearly recorded and there’s no ambiguity.

Digital Identity and KYC

If you have to pass identity verification, then you have to collect various details about your life. Now, it is a tiresome job because, at some points, you will be asked to provide a considerable number of documents that include your job details, bank records, demographic facts, and much more. So, you will have to run at various institutions to get everything in a single file.

digital identity

On the other hand, smart contracts can completely solve the problem with the help of digital identity. Here, all the data will be present at a single place in the network. With this, KYC verification will also become instant. On top of that, your privacy will remain intact because you can control the amount of information that you wish to disclose in front of people.

Other than these applications, there are plenty of other applications of smart contracts in the current technology world.

Now, let us understand why we need smart contracts and some of their key benefits.

What is the need for Smart Contracts?

Smart Contracts have turned out to be highly beneficial to various sectors. Here are some of the key benefits of smart contracts.

Cost-saving option

Smart contracts remove the intermediaries from the entire process. With this, not only is the cost reduced, but even the transactions become faster.


The most significant benefit of smart contracts is the level of automation it provides. There is no need for human intervention as well as no third party can make changes to the smart contract. Businesses can utilize smart contracts to automate several aspects of their business. On top of that, it can help out in resolving various processes where trust is an issue.

Enhanced Security

Smart contracts are known to be unique because of their security. All the processes are performed securely, with smart contracts only working as they are intended to work. The data available in them is immutable, which is why it cannot be altered. All the information in smart contracts is completely secure.

Smart contracts are secure

Transparency and Reliability 

In smart contracts, all the encrypted records of the transactions are shared with the participants. So, there are no issues of trust because everything is transparent in front of the participants. Other than that, no participant can tamper with the data available in smart contracts. This is the reason why they are considered to be more reliable as compared to traditional records.

Proper Storage 

Smart contracts turn out to be pretty helpful in storing vital information. Even if there is any data loss, you can easily retrieve data from smart contracts as all the details are permanently stored in the network.

Assured Outcomes 

The best thing about smart contracts is that it runs by rules mentioned in the code. If any particular criterion is met, the smart contract will execute the transaction mentioned in it. So, there is no chance of fraud or any such scenario.

Crystal-Clear Communication

Every single detail has to be mentioned when you are setting up smart contracts and coding them. So, there is no chance of miscommunication or any detail being misplaced because both parties have to write everything. When the communication is clear, you will notice skyrocketing efficiency.

With these benefits, it would be pretty much clear that they are highly beneficial in different sectors. This is why their importance is consistently rising.

Conclusion  👩‍🏫

Currently, there are plenty of blockchain platforms adopting the use of smart contracts, including Ethereum, Corda, Hyperledger, and more. The support of blockchain technologies is constantly growing, and with it, the need for smart contracts in every platform is also growing.

  • Dhruv Parmar
    Dhruv is a senior content writer at Geekflare with proficiency in every niche. He mainly focuses on technology, product reviews, crypto, blockchain, and how-to articles. Other than these niches, he also likes to write about freelancing,… read more
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