Skip to main content
smart contracts

Smart Contracts: The truth about smart contracts explained

What are smart contracts? Why should you even care about it?

Do you know what’s more important than blockchain? It’s smart contracts. The only thing that can help the most popular application of blockchain, cryptocurrency, survive odds it has by the lawmakers.

It would be apt if we call the smart contracts as the backbone of blockchain technology. As is not only helps cryptocurrency be what it ought to be, without disappointing the lawmakers. But it also will help all the blockchain applications, both current and future application to do more and govern the overall functionality of that particular application.

So, what are smart contracts?

That’s exactly what we’re going to discuss in this post. As part of this post, we will be touching the following:

  1. What are smart contracts?
    1. Why are smart contracts important?
  2. How do smart contracts work in a blockchain?
  3. Problem with Smart Contracts
  4. Future of Smart Contracts
  5. Conclusion

Let’s dive-in directly

What are Smart Contracts?

Smart contracts is a way by which you can sell any or exchange anything of value without any conflict, hassle, middlemen, and fear of fraud. Smart contracts are basically the pre-defined rules to make decision making and authorize things easy, quick and legal.

Imagine smart contracts as the lawyers inside the blockchain. Unlike the lawyers in the real world, you don’t have to wait for days to get a legal document.

Sure, blockchain is probably the most important invention of recent times. It has decentralized the densely connected world. But there’s something that makes it this powerful, it’s the smart contracts.

As the name suggests, a smart contract is a contract containing legal agreements abiding by rules and penalties, just smart enough to decide and execute on its own.

Picture this:

Your friend rents an apartment from you. Not taking the traditional route, you end up making an agreement on blockchain by getting paid in cryptocurrency. The agreement of this deal is virtual for which you get the receipt. The contract is designed in such a way that if your friend doesn’t pay the rent on time on a specified date, the contract would go out of validity automatically and your friend would need to renew the agreement from scratch, that too with a fine. The contract works on the digital key that governs the whole agreement. The digital key is nothing but the entry key of the payment made as rent of the apartment.

Since the contract is on the blockchain, the payment will take minutes to approved, obviously depending on the cryptocurrency you use. The contract cannot be tampered by either of you two. If you want to discontinue the deal, simply stop the payment and contract will be destroyed on its own. No single person can alter the contract without the consent of the other.

You can use smart contracts exactly like traditional agreements. Doesn’t matter what you require the agreement for, if you can make a traditional agreement, you can make a smart contract for that. Unlike the traditional agreements, smart contracts cannot be altered without the consent of all the parties involved, forged or used to manipulate anything.

So, you now understand the potential the Smart contracts have.

But there’s more to this.

Why are Smart Contracts important?

Did we mention that Smart Contracts existed even before blockchain was a real thing? Well, we just did. That justifies why smart contracts are more important than blockchain itself, not because they’re older than blockchain itself. Rather, the smart contract has been solving real-life problem by code for a longer time than blockchain has been doing.

That being said, let have a look at what smart contracts give you

Self Reliance: While you rely on smart contracts to make an agreement for anything, you don’t need to rely on any lawyer, broker or any legal body for that. Using smart contracts also eliminated the chances of unapproved manipulation of the contracts or any kind of frauds in the agreement. Everything about the agreement is on the network and is being watched by the whole blockchain community.

Trust: The supporting agreement documents are stored in the public ledger and are completely encrypted for people other than those involved in the agreement. There’s no way anyone will know it even exists on the network, let alone access it. Furthermore, there is no way anyone losing it. It’s digital, it’s safe and accessible anytime.

Backup: Your documents are backed up several times, as and when you update it. And those whom you choose to share it with will have a copy of it. This way, you never lose anything of utmost importance and your friends always have your back.

Safety: We don’t need to emphasize much on this. Cryptography has been doing a great job encrypting things that matter the most. Cryptography is also being used to encrypt websites to prevent it from unauthorized attacks. Furthermore, it would take an exceptionally smart hacker to decode the encryption. Imagine this way, cryptography encrypts in such a way that even the system cannot reverse it. Manually it is possible, but it is not an easy wizy thing to do.

Speed: Traditional things have been here for quite a while now, but we’ve been through this at least once. It’s boring, time-consuming and cumbersome. Remember your passport procedures? Sigh here, sigh there. Its excellent test of your patience. With smart contracts, this is no more a thing.

Savings: Needless to say, the amount of time and money you’d save by using smart contracts. There are no middlemen to charge you for every heartbeat they spend to work for you. Just have a smart contract and you are ready as ever.

Error-free: Sure, smart contracts are still under observation but it does the thing. They’ve been proving their worth every once in a while. It works without any biases and errors. It auto executes and works as programmed, no exception.

This is what Patrick Hubbard, Head Geek, SolarWinds has to say

“Smart Contracts are where the rubber meets the road for businesses and blockchain technology. While a few highly specialized distributed financial services use cases for blockchain have appeared—for example, payment ledger services for the Yangon Stock Exchange in Myanmar.

It's services on top of blockchain that are really interesting. In the Yangon Exchange, it solves the problem of distributed settlement in a trading system that only synchronizes trades twice a day. But the autonomous execution capacities of smart contracts extend the transactional security assurance of blockchain into situations where complex, evolving context transitions are required. And it’s this possibility that has Amazon, Microsoft Azure and IBM Bluemix rolling out Blockchain-as-a-Service (Baas) from the cloud.”  

How Smart Contracts work in a blockchain?

Breaking the Ice, you probably can visualize how smart contracts work.  But to further explain the technicalities better, here’s what you need.

A smart contract can be implemented by implementing other smart contracts. This can be to ensure that each of the smart contracts takes a certain decision and is dependent on each other. What this will do is make the overall smart contract’s architecture more functional and far more efficient. As an example, there can be a smart contract that renews itself by triggering another smart contract after a specific time.

Having said that, let us tell you what comprises of a smart contract and explain every inch of it.

Objects of a Smart Contract

Signatories: Two or more people involved in the agreement who make a pact and code down rules they agree or disagree to. This can be between registered companies, individuals, group, community, you name it. Anyone can use it.

Subject: The subject on which the agreement lies, an object that’s within in the smart contract – encoded inside. There was a problem when smart contracts were a lone survivor in 1996. The problem was that the smart contract needed the exclusive access to this object. However, this problem was overcome to a great extent since cryptocurrency happened in 2009.

Rules or Terms: Unlike traditional agreement, where you write the rules or terms in the native language. Smart Contracts needed the rules to be mathematically described. Additionally, this mathematical description should be further spoon-fed to the blockchain by using a programming language. This included everything you’d include in the traditional agreement. Like rules, terms, rewards/fees (if any) time limit, parties involved etc.


To function well, smart contracts need a certain ambiance. Just like anything else, smart contracts are functional only in certain conditions. That condition being the ability to support using public-key cryptography.

This enables a user to cryptographically sign a transaction using the unique cryptographic code. This is what the cryptocurrencies utilize when a user initiates a transaction. Behind the scenes, the user cryptographically signs off that transaction which is read by the verifying algorithm.

Furthermore, it goes without saying that smart contracts need a decentralized database. This is to ensure that the smart contracts are fully functional without any middlemen. Just like cryptocurrency, or any blockchain based application for that matter, even a smart contract is omnipresent on the whole network on the blockchain, while active.

Ethereum, for example, makes a right fit to be called as a perfect environment for smart contracts. It is completely decentralized and has the ability to support the public-key cryptography.

One last thing that is extremely important is that the digital data that the smart contract relies on should be absolutely reliable.

Everything seems so rosy. Don’t you find something fishy here? Well, it turns out there are some things you wouldn’t like to notice. This takes us to our next section.

Problem with Smart Contracts

Since the smart contracts are a piece of code, there are chances that it might be bombed by bugs. How can governments rely on a piece of code to run a nation? Who’s to held responsible if the code breaks?

In case of any activity done against the smart contract, how can pull that off to the court? Blockchain has no authority, what if the lawmakers disapprove the whole say considering the fact that a piece of code is not considered a legally approved agreement.

There is no authoritative regulation or governance that approves smart contracts. What if there’s a situation where you have to compromise a bit by understanding but you cannot reverse or stop the contract from doing what it ought to. The smart contract will execute, whatsoever.

Smart contracts are not even close to calling a perfect replacement for traditional contracts. Already, cryptocurrency is in a gray zone in many countries. Smart contracts being another one lately added to the list.

Future of Smart Contracts

While the blockchain community figures out a way to clear the list aforementioned and those that you can think of, it’s a big question mark of its existence. It's improving continuously day in & day out.

If smart contracts are to stay, we’re heading towards a world nothing less than a sci-fi movie. Where everything apart from being digital is decentralized too. If the list is cleared and smart contracts make its way to our lived, the lawyers who were into writing agreements traditionally. Will switch seats in writing templates and smart contracts.

A future where agreements will be governed by code is inching towards us. And one of the best parts is that we will save tons of paper.


Sure, smart contracts have a lot of potentials, we will need to wait till governments give a green signal to it. Before that could happen, the blockchain developers and enthusiasts need to come up with ways to tackle problems smart contracts has right now. This should be without compromising the core nature of blockchain – decentralization.

Things still stay traditional where parties are required to sign agreements, its just they’ll do it digitally. We wouldn’t be surprised to see court marriages happening with thumbprints for marriage certificate stored on a blockchain.

Over to you. What did you think of the information you got to know? If you’re reading this, we thank you for sticking around till the end. Leave your thoughts on smart contracts below in comment section.

Feel free to share this article on your social networking profile and with those who are looking for this information.  

Did you know that you can support this website by reading it on Brave Browser. Enjoy private, secure and fast browsing with Brave.