What is a Smart contract and How does it work?

Ryan Laguatan

Ryan Laguatan is a Project Coordinator. He wrote freelance articles about sneakers and now he is in the cryptocurrency world doing his part in pushing for mass adoption.

Traditional contracts we use today involve a lot of paperwork and third-party interference. These costs can add up and are often time-consuming. Smart Contracts built on decentralized applications can save you time and money. It provides transparency, security, and eliminates human errors. Learn more about Smart Contracts in this guide.


hether it is buying a house, renting a car, or any major expense, you will need a contract. Contracts involve a lot of paperwork, so people hire third-party members to do it for them. Those who have sold a house most likely reached out to a real estate agent to help with all the paperwork.

After selling the house, a part of their sale goes to the agent as a commission fee. This limits the profit that the seller can make. Imagine a process where selling a house does not involve a real estate agent or paperwork. This is the purpose of Smart Contracts.

First coined in 1997 by Nick Szabo, Smart Contracts are the same as regular contracts. The difference is they are digital and stored on a distributed ledger. After the invention of blockchain, computer developers started to focus on Smart Contract development. This has led to the development of the platform Ethereum.

Blockchain and Smart Contracts share the same benefits. Smart Contracts are fast and accurate. You do not have to spend time with paperwork or correcting errors written into documents. Smart Contracts are trustworthy: the contracts execute transactions by following predetermined rules.

The programming shares the rules of these transactions to everyone involved. This makes every action in the contract transparent. Encryption from blockchain technology makes Smart Contract records secured and connected.

To change one record, you must change all the previous ones. Because of encryption and connected records, smart contracts are almost impossible to hack.

Smart Contracts are comparable to vending machines. When you pay the machine, you put in a code, and after that, you receive the product. The programming of Smart Contracts is the same.

You make a payment to the contract, and the document/rights to the contract are now in your ownership. Smart Contract define and enforce the rules in the contract. This ensures that everyone in the contract is following the rules.

To use a practical application of Smart Contracts, let’s use Kickstarter as an example. When someone wants to raise money for a project, they would use Kickstarter. After the project reaches its goal, Kickstarter will release the funds to those that need the money.

In this case, Kickstarter is the middleman between the developers and the donors. Both the developers and donors need to trust Kickstarter to distribute the money. By using a Smart Contract, you do not need a middleman at all.

Programmed into the Smart Contract is the funding amount. The funds that get donated stay locked in the contract. After the full amount is reached, all the funds go to the people who need it. Smart Contracts have two characteristics, Smart Contracts are: immutable and distributed.

Immutable means that once the contract is programmed, no one can tamper with it, not even the original creator. Distributed means everyone involved in the contract also validates the results.

This means that the contract cannot be released by one person, everyone must agree. These characteristics make transactions easy. They remove liabilities from both parties because all the terms are programmed and agreed to.

Besides crowdfunding, Insurance, Health and Government sectors can benefit from Smart Contract Technology. With all their paperwork being digital and automatic, these sectors can operate at a faster rate.

Insurance claims and Health checks can now be completed within one day. Voting systems based on smart contract technology protect votes from fraud. The security of the Smart Contract allows for all these things to happen.

Like all new technologies, there are challenges to developing Smart Contracts. Since the contracts act on their own, the code must be written with no bugs. Bugs in the code will lead exploitation from scammers. Also, governments must consider regulation of these contracts.

Since the contracts are programmed to execute no matter what, governments will have a hard time voiding the terms of the contract. Situations like disputes or unexpected events will prove to be a challenge. Even so, Smart Contract technology has a lot of potential, and can shape many businesses in the future.

Ryan Laguatan

Ryan Laguatan is a Project Coordinator. He wrote freelance articles about sneakers and now he is in the cryptocurrency world doing his part in pushing for mass adoption.

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