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What is a Smart Contract?

You’ve heard the term smart contract before. It’s what Ethereum is based on. But what exactly is a smart contract? And are there limits to what one can do? Read on to find out more.

What is a Smart Contract?

A Smart Contract is a type of contract or computer program that regulates the transfer of digital assets or currencies between two parties once a specificed condition has been filled. It is self-executing, such that the details of the contract are inscribed in lines of code visible and assessable to all parties involved.

These contracts can be used for exchanging money, property, or anything else of value quickly, transparently, and free of intermediaries and their associated costs. It prevents any disputes that would occur with paper money because the contract will self-execute without needing input when the conditions are met.

Smart Contracts are among the most popular and effective uses of blockchain technology. They are currently being used by several platforms, including Ethereum, Tezos, Algorand, Stellar, and more.

Romain Dancre Dopl Sdel X7 E Unsplash

How Does a Smart Contract Work?

A smart contract works just the same as about any other contract. You decide the terms first, but then, instead of writing out a physical contract, you build software which executes when terms are met. These terms can be monetary, or physical, such as well a box is checked on a website.

For example, you could agree to bet your sister that your favorite team will win tomorrow. But because you live in different states, you decide to use a smart contract. You program it yourself to pay out you if your team wins, but if they lose it will pay our your sister. Then, you load the money you agreed upon into the smart contract.

The money will remain there until the program discovers which team has won. It can find this out if you've set it up with an outside connection to the internet. If you haven't there will likely be an input for the winner of the team. Once this is done, the smart contract will automatically release the funds to either you or your sister, depending on who won.

But smart contracts go far beyond just exchanging money or goods, they can also be used for the following.

  • Businesses can use them to manage supply chains
  • They can be used to calculate complicated financial derivatives
  • They can be used as the backbone for computer programing’
  • Smart contracts can be used to make NFTs
  • They can be set up to provide automated responses (think out of office emails)
  • You can program them to reply to messages
  • They can be used to track shipments to customers
  • They can be used as an escrow service.

 Setting up a smart contract isn’t easy and typically takes computer programming skills. If you aren’t able to code then it is recommended that you don’t try to tackle making a smart contract on your own.

As for using a smart contract, chances are you might have already. Using a smart contract can happen for the smallest actions on the blockchain. For example, much of the metaverse is being programmed using smart contracts.  

Do All Blockchains Have Smart Contracts?

First off, it is important to note that most cryptocurrencies use blockchain technology. At this point, the proper knowledge of the concept of blockchain technology is crucial. A blockchain is a digital ledger consisting of transactions duplicated all over a computer system on a digital chain of blocks.

So, does all blockchain have smart contracts? The answer is no. Cryptocurrency Blockchains are developed as solutions to particular problems. A prime example is Bitcoin; the world’s first major cryptocurrency on the blockchain. When Bitcoin was founded, it was designed to serve as a decentralized currency.  This implied that all that was needed for Bitcoin to achieve the aim for which it was set up was decentralization and security. Therefore Bitcoin does not run smart contracts or anything similar.

As the years went by, the need for a smart contract on the Bitcoin cryptocurrency blockchain became pronounced. Today, Stacks are a blockchain platform that serves as Bitcoin’s Smart Contract Layer.

This has helped Bitcoin gain a new set of use cases and increase its strength as the world's most popular cryptocurrency on the blockchain.  It would interest you to know that, aside from Stacks, there are several other platforms that serve as smart contract platforms for Bitcoin. Another example is Arkadio, a Bitcoin DEFI app that assists users in procuring up a loan that would be automatically repaid from their cryptocurrency balance.

Kelly Sikkema L Nlzd Y7orw Unsplash

Smart Contract Applications

There are a lot of use cases for smart contracts that have seen adoption in many aspects of our day-to-day lives. It includes the following:

Real Estate

It wouldn’t be real estate without signing a bunch of documents. Imagine how much easier buying a house would be if everything was digital? You aren’t the only one thinking that and there are some real estate companies currently working to get their escrow services onto the blockchain.


Often, shipping of a good or commodity involves many parties and documents. This challenge can cause lots of bottlenecks and other problems if not properly handled. However, it could be solved if a smart contract were deployed in the shipping process. Already, a few companies like Tradelens and Mersek have adopted the use of Smart Contracts in facilitating international trade.

Voting System

A smart contract voting system would change many of the problems in America. No one would be able to rig elections, and there would be no worries about getting to the poles. In recent elections, Utah has tested blockchain voting and found that it was very helpful for getting votes counted and turned in on time.

Healthcare System

If you’ve ever gone to a new doctors office, you know all about the hassle of filling out new forms. They are then put in a paper file and likely kept at the back of the doctors office. Not only is this not safe, but this is such a hassle to all parties involved. Using blockchain and smart contracts to protect patient files could remedy this problem.

Overall, smart contracts are a sophisticated computer protocol that have proved to be a disruptive technology with potential to transform in the future. They have brought about remarkable changes in the way people work, play, conduct business, and many other spheres of life.

Whether you believe in blockchain technology or not, it is something which is here to stay which is why it is better for you to learn about it now before you find yourself getting behind the times!

Smart contract | Ethereum | Real estate | Blockchain | Healthcare | Defi

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