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What is Smart Contract in Blockchain? Definition & Example

Updated 2023-08-17 12:14:12

Transparency, security, and efficiency have been introduced by blockchain technology, which has altered the way transactions are handled. The concept of smart contracts is at the heart of this blockchain innovation. Smart contracts have emerged as a vital instrument transforming the traditional contract process by bringing automation and trust to the fore.


This article will delve into smart contracts, investigating their definition, functioning mechanism, and importance. We will also look at the benefits and drawbacks of smart contracts and their potential applications in various industries. We can appreciate smart contracts' transformational capacity in revolutionizing blockchain transactions by thoroughly understanding them.


What is a smart contract?

A Smart Contract is a set of rules that can execute automatically on the blockchain


A Smart Contract is a set of rules and conditions that can execute automatically on the blockchain. The code is saved in blockchain and run based on certain conditions. The goals of smart contracts are to reduce contract intermediaries leading to lower fees and less error from humans.


Smart contracts are often written in programming languages tailored to the blockchain platform they run, such as Solidity for Ethereum or Chaincode for Hyperledger Fabric. These contracts are placed on the blockchain, where they become permanent, transparent, and tamper-proof records.


Smart Contracts are often written in solidity or other languages to run on the blockchain


The beauty of smart contracts is their ability to perform actions based on predefined circumstances autonomously. A smart contract, for example, can be programmed to release funds to the seller whenever the buyer's payment is received and verified in a real estate transaction. This automatic execution eliminates the need for middlemen, shortens transaction times, and improves efficiency.


Smart contracts, as opposed to traditional contracts, do not require the involvement of third parties or trusted intermediators such as lawyers or brokers to enforce the conditions. The logic of the contract is built into the code, ensuring that the predefined rules are enforced autonomously without the possibility of change or manipulation.


How does a smart contract work?

How does a smart contract work?


Smart contracts are based on blockchain technology's decentralized and distributed ledger design. Let's look at the main components and stages involved in the operation of a smart contract:


Smart Contract Preparation

The first stage in using a smart contract is defining the terms and conditions of the agreement between the parties involved. This includes determining the actions, triggers, and states that will cause the contract to execute automatically.


Once the contract terms have been specified, the smart contract is coded in a programming language appropriate for the blockchain platform of choice. Solidity, for example, is used by Ethereum and enables developers to make smart contracts that can be implemented on the Ethereum blockchain.


Smart Contract Deployment

The programmed smart contract is subsequently deployed onto the blockchain network. This entails transferring the contract code to the blockchain, which is stored and copied across numerous network nodes.


Smart Contract Triggering

Smart contracts are programmed to run automatically when specific predetermined criteria are satisfied. These criteria can be based on specific inputs, events, or dates. In a crowdfunding campaign, for example, the smart contract can be designed to deliver funds to the project when a predefined financial goal is met.


Smart Contracts are often executed automatically based on specific criteria


Validation and Execution

Once the triggering circumstances are met, the blockchain network validates and executes the smart contract. The blockchain's decentralized nature ensures that many nodes validate the contract's execution, boosting security and consensus.


Transactions and State Changes

Every activity performed within the smart contract, such as asset transfer or data alteration, is recorded as a transaction on the blockchain. These immutable transactions provide a clear record of the contract's state changes.


Automatic Enforcement

Smart contracts enforce agreed-upon activities autonomously based on specified rules embedded in the contract's code. This automation eliminates the need for middlemen and ensures that the contract is executed tamper-proof and transparently.


Contract Finalization

The contract is considered fulfilled, and the transaction is finalized after all of the criteria and actions stated in the smart contract are met. The contract's conditions have been enforced, and the agreed-upon outcomes have been realized.


Why are smart contracts important?

Why are smart contracts important?


Smart contracts are significant in the domain of blockchain technology for a multitude of reasons. Let us look at some of the essential characteristics that contribute to the value of smart contracts:


Automation and efficiency

Smart contracts automate contractual terms execution, removing the need for manual intervention. This automation dramatically decreases the time and effort required to process and enforce agreements. Smart contracts improve efficiency and eliminate transactional delays by removing intermediaries and streamlining processes.


Trust and Security

Smart contracts operate on a decentralized blockchain network, taking advantage of the network's inherent security features. The blockchain's immutability and transparency ensure that once a smart contract is established, it cannot be tampered with or altered without the network's participants' consent. Because the terms are executed autonomously and cannot be modified, this trustless environment instills confidence among contract parties.


Cost Savings

Smart contracts have the potential to drastically lower contract execution costs. Removing intermediaries such as lawyers, brokers, and other middlemen reduces the necessity for their services and associated fees. Furthermore, contract enforcement automation and decreased human procedures and administrative costs make transactions more inexpensive.



Transparency is a core feature of blockchain technology. This functionality is used by smart contracts, which record all contract-related actions and transactions on the blockchain. This transparency allows all parties to see how the contract is being carried out, ensuring accountability and lowering the likelihood of conflicts.



Smart contracts eliminate the need for middlemen, allowing for peer-to-peer interactions. This disintermediation allows individuals and corporations to interact directly with one another, reducing the need for intermediaries who may impose delays, fees, or biases. Smart contracts enable direct secure and handle transactions, making the corporate environment more inclusive and accessible.


Pros of smart contracts

5 Pros of smart contracts


Smart contracts have multiple characteristics that make them extremely useful in a variety of situations. Let's look at some of the main benefits of smart contracts:



When a smart contract is created on the blockchain, it becomes immutable, which means it cannot be changed or canceled easily. While this feature assures the contract's integrity and trustworthiness, it can also provide difficulties if faults or unforeseen events occur. Rectifying errors or addressing contract changes may necessitate complex procedures or, perhaps, contract reorganization.


Speed and efficiency

Smart contracts automate contract execution, removing the need for manual intervention and streamlining operations. Smart contracts greatly minimize the time and effort required to execute agreements by eliminating intermediaries and manual processes. This improved efficiency results in faster transaction processing and shorter settlement periods.


Cost Savings

One of the most significant benefits of smart contracts is the potential for cost savings. Smart contracts eliminate the associated expenses and overheads by removing intermediaries such as lawyers, brokers, or notaries. Contract enforcement and administration operations that are automated save money on administrative costs. As a result, smart contracts provide a more cost-effective means of performing transactions and carrying out commitments.



Smart contracts function on specified circumstances and rules that are encoded in code. Human error, misinterpretation, or manipulation are therefore eliminated. The blockchain's transparency and immutability ensure that the conditions of the contract are carried out as intended, increasing trust among the parties involved.



Smart contracts run on a blockchain that is both transparent and immutable. The contract's code and transaction history are accessible to all participants. This transparency allows for efficient auditing and offers a thorough audit trail of all contract-related activity. The capacity to trace and verify transactions increases transparency while decreasing the possibility of fraud or disputes.


Cons of smart contracts

4 Cons of smart contracts


While smart contracts have tremendous advantages, they do have limitations and drawbacks. It is critical to examine the following disadvantages of smart contracts:


Security and Code vulnerabilities

Smart contracts are written in code, and like any program, they can contain errors, vulnerabilities, and accidental exceptions. Smart contracts can be exploited by bad behaviors if they are not adequately vetted and tested. Code flaws can result in revenue loss, security breaches, fraud losses, or contract breaches, compromising the smart contract system's confidence and trustworthiness.


Oracles and External Data Sources

To perform actions based on real-world events or information, smart contracts frequently rely on external data sources known as oracles. Using oracles offers a possible point of failure and can expose you to risk. If the oracle is hacked or gives false data, it can result in incorrect contract execution or other unpleasant effects.


Scalability and Performance

As blockchain technology becomes more widely used, scalability and performance become essential factors. For example, Smart contracts executed on Ethereum blockchains have scalability and transaction throughput problems. Network congestion can emerge as more contracts are deployed and executed, leading to delays and increasing transaction costs.


Privacy Constraints

The blockchain's transparent nature, which assures transparency and immutability, may collide with the need for privacy in some types of contracts. While efforts are being made to build privacy-enhancing blockchain technology, such as zero-knowledge proofs, striking a balance between privacy and openness remains difficult.


Applications of smart contract

Applications of smart contract


Smart contracts have the potential to transform a variety of businesses by reducing operations, increasing efficiency, and fostering trust. Here are a few examples of where smart contracts are being used:


Supply Chain Management

Smart contracts can increase supply chain transparency and traceability. Smart contracts offer more effective supply chain management by automating contract execution, validating product authenticity, and tracking shipments. They can assist in decreasing fraud, assure regulatory compliance, and boost participant trust.


Financial Services

Smart contracts have a variety of applications in the financial sector. They have the ability to automate and streamline operations, including loan agreements, insurance claims, and trade settlements. Smart contracts can reduce expenses and boost the speed of financial transactions by eliminating middleman and decreasing administrative overhead.


Real Estate

The real estate industry is complicated, with many intermediaries. Property transfers, rental agreements, and escrow services are examples of tasks that smart contracts can simplify and automate. Smart contracts can save expenses, prevent fraud, and boost the efficiency of real estate transactions by executing contracts automatically and securely.


Intellectual Property

Smart contracts can be used to enforce intellectual property rights like copyright, patents, and trademarks. Smart contracts help creators to secure their intellectual property and obtain fair recompense for their work by automating royalty payments, licensing agreements, and content distribution.



Smart contracts in healthcare systems can improve data security, interoperability, and patient consent management. They can enable safe medical record sharing, automate insurance claims processing, and support precision medicine programs. Other Smart contracts can also help secure data privacy compliance and improve patient-centric healthcare services.


Voting and Governance

Smart contracts can be used to enhance openness and security in voting systems and governance processes. Smart contracts can avoid fraud and interference in democratic processes by automating the voting process and storing the results on the blockchain. They can also help organizations and communities implement decentralized governance models.


Supply Chain Finance

Smart contracts have the potential to transform supply chain financing by automating payment settlements, eliminating bureaucracy, and increasing participant trust. Suppliers can receive quick payments based on established criteria by utilizing smart contracts, improving cash flow and liquidity in supply chains.



Within the world of blockchain technology, smart contracts have emerged as a strong and transformational invention. They provide agreement and transaction execution automation, efficiency, transparency, and security. While smart contracts have advantages and disadvantages, the potential benefits are obvious.


Smart contracts have the potential to revolutionize industries such as supply chain management, financial services, real estate, healthcare, and others by eliminating intermediaries, improving processes, and increasing trust. They provide cost savings, enhanced efficiency, and easier access to financial services. Furthermore, smart contracts provide transparency, audibility, and accountability, lowering the risk of fraud and conflicts.


As technology advances, issues like scalability, legal frameworks, privacy, and code vulnerabilities are being addressed. Efforts are being made to improve smart contract user interfaces and usability. Smart contracts, with continued development and refinement, have the possibility of altering existing business practices and enabling a more efficient, secure, and inclusive digital economy.