What are Smart contracts?

The blockchain technology has brought about innovations like cryptocurrencies (Digital assets). Just as cryptocurrencies are borne from blockchain tech, so are smart contracts. You may have passively come across the term ‘smart contracts’ but not extensively understood what it’s about. What does it mean? What has it got to do with blockchain? Does one need a Lawyer for it? These are common questions that wouldn’t go unanswered in this 5minute read


A Smart contract or self-executing contract is a computer code that runs on top of a blockchain, it contains a set of rules that governs a specific agreement of parties involved. When the pre-determined rules or requirements are met, the agreement is automatically enforced. Just as the regular contract is drawn up for different purposes, to be read, understood and signed by two or more parties, smart contracts take the same form. The smart contract code facilitates, verifies, and enforces the negotiation or performance of an agreement or transaction.

Smart contracts and Blockchain– The non-centralized nature of the blockchain system allows for the possibility of digital contracts. This implies no middlemen or mediator needed. A cryptographer and legal scholar, Nick Szabo found in 1994 that the decentralized ledger could be used for smart contracts. His format converted contracts to computer code, stored the contracts and replicated them on the system. These contracts are intended to be supervised by the network of computers that run the blockchain. Hence, ledger feedback is automatically sent to the parties involved in the contract in the event of transferring money and receiving the product or service. With smart contracts, one can draw up agreements to execute transactions like a sale of property or goods. The essence of making contracts is to ensure (compliance) neither of the parties involved goes back on fulfilling their part of the agreement and ensures the exchange or transaction goes according to a set of guidelines or instructions. These transactions are trackable but are irreversible. An agreement made by word of mouth can easily be broken.

In simple words, a smart contract is an agreement between two parties in which its requirements are facilitated automatically/online. It involves digital assets and two or more parties, where some or all of the parties deposit assets into the smart contract and these assets will then be redistributed among those parties according to a formula-based ratio, which is at the time of contract initiation, not known.

Types of Smart Contracts

Although Bitcoin was the first innovation that took advantage of the blockchain system, the Ethereum (an open-source, public, blockchain-based distributed computing platform and operating system featuring smart contract functionality) is said to be the next in line.

The smart contracts are a natural functionality of the Ethereum. Since smart contracts are written in computer codes, one can program whatever specification to a contract they want to create. Any type of contract created according to particular codes may contain bugs (some glitches) so different templates are created.

In essence, there are an infinite amount of smart contracts to be created and one can’t say for sure how many types of smart contracts exist. But, some of the existing thousands of cryptocurrencies have implemented their different types of smart contracts.

The foremost types are the smart contracts on the Ethereum blockchain. First, there’s ERC20 which is used to launch a token on the Ethereum blockchain. It is probably the best known smart contract in the world. Then ERC-223 came as an amplified ERC20 that may replace it if it tests free from bugs. ERC-721 is the third smart contract for creating tokens that are used for crypto kitties, where every token is unique.

It is notable that contractual clauses can be made partially or fully self-executing, self-enforcing, or both.



Benefits from Smart Contracts

It is not enough to know about these contracts without learning its use and/or advantages. The Blockchain technology may have its problems/ shortcoming but ratings from the blockchain related innovations have been through the roof; governments and companies have quickened towards exploring them. There is definitely no confusion that the smart contract has its benefits.

Smart contracts are Cheaper- The first interest of anyone in a transaction would probably be ‘How much.’ Smart contracts are proven to be relatively cheaper. There is no physical agent mediating the terms of the agreement in a contract and this reduces other transaction costs associated with contracting.

Smart Contracts are faster -Smart contracts are automatic hence eliminating any long procedure. Pre-created Templates make it straightforward enough for contracts to be executed in little time. Undoubtedly, traditional contracts take a longer process, from drafting the contract to formalizing both parties with it before enforcing it.

Smart contracts are Highly Secure- Security is a known characteristic of blockchain technology. This gives a backing that smart contracts are secure. Only authorized parties can view the contract, its terms and other information included in the agreement. Smart contracts are capable of tracking performance in real time and controlling happens without obstruction. Real-time tracking and absolute control make these contracts tamper resistant, this is indeed high security.


In a nutshell- Smart contracts exist online. With smart contracts, Legal obligations become automated processes. There is a guarantee of high security with smart contracts. No reliance on intermediaries is necessary for smart contracts.

Clearly, the concept behind smart contracts is not a new one. It can be as simple as placing an order for a meal from a machine. The machine is programmed to process the expected request. If a person would input details of an order and wait the expected result comes through.  For these contracts, if you state that you want to sell a car, for instance, a willing buyer will suffice. The smart contract template can then be initiated to determine terms of payment and whatever else is relevant. It is left for both parties to read through and append digital signatures. Then the platform will transfer funds as directed by the buyer. This whole contract process is according to what is embedded in the computer codes.

Smart contracts may be disruptive for the previously existing protocol in law practice. Imagine there is no need for Legal Experts as an intermediary for contracts, but realistically, legal experts work in capacities other than just contracts. There is yet to be an automated system that will represent a defendant in court, even at that, the existence of smart contracts is a plausible step in technology.

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Credits- blockgeeks, Wikipedia, blockchain hub, Quora, Bitdegree.



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