What are Smart Contracts?

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What are Smart Contracts For?

Imagine that you need to sell a house. It is quite a complicated and daunting process that involves a lot of paperwork, communication with different companies and people, as well as a high level of risk. This is why the absolute majority of home sellers decide to find a real estate agent who will take care of all the paperwork, market the property, and act as a go-between when negotiations begin, monitoring the deal until it closes.

On the other hand, the agency provides an escrow service, which is especially useful in such transactions, since the sums involved are normally quite large and you cannot really fully trust the person you are dealing with. However, after the successful transaction, the seller’s and buyer’s agents will share about seven percent of the sale price as their commission. This represents a considerable financial loss for the seller.

It’s situations like this where smart contracts could be really useful and effectively revolutionize an entire industry while making the process much less of a burden. Perhaps most importantly, they would solve a trust problem. Smart contracts work on the principle of “if-then”, which means that the ownership of the house will be transferred to the buyer only when the agreed amount of money is sent to the system.

They also function as escrow services, meaning that both money and property rights will be stored in the system and distributed to participating parties at exactly the same time. In addition, the transaction is witnessed and verified by hundreds of people, so flawless delivery is guaranteed. As trust between the parties is no longer an issue, there is no need for an intermediary. All the functions that a real estate agent performs can be pre-programmed into a smart contract while saving considerable amounts of money for both the seller and the buyer.

“And this is just one example of the potential uses of smart contracts. They are capable of facilitating the exchange of money, goods, and anything else of value, ensuring full transparency, avoiding the services and fees of an intermediary, and eradicating the issue of trust between the parties. The code of a particular smart contract includes all the terms and conditions agreed to by the parties, and the information about the transaction itself is recorded on a blockchain, a decentralized and distributed public ledger.”

How Smart Contracts Work

Simply put, smart contracts look a lot like vending machines. You simply deposit a required amount of cryptocurrency into the smart contract, and your security deposit, homeownership, driver’s license, or whatever falls into your account. All the rules and penalties are not only predefined by smart contracts but are also enforced by them.

1. Interdependence

A smart contract can work on its own, but it can also be implemented in conjunction with any number of other smart contracts. They can be established in a way that they will depend on each other. For example, the successful completion of a particular smart contract can trigger the initiation of another, and so on. In theory, entire systems and organizations can be fully powered by smart contracts. To some extent, this is already implemented in various cryptocurrency systems, where all laws are predefined and because of that, the network itself can function autonomously and independently.

2. Smart Contract Objects

Essentially, there are three integral parts, also called objects, to every smart contract. The first is the signatories, that is, the two or more parties using the smart contract, who agree or disagree with the terms of the agreement using digital signatures.

The second object is the object of the agreement. It can only be an object that exists in the environment of the smart contract. Alternatively, smart contracts must have direct and unhindered access to the object. Although smart contracts were first discussed in 1996, it was this particular object that stopped their development. This problem was partially solved only after the first cryptocurrency appeared in 2009.

Finally, every smart contract must include specific conditions. These terms must be mathematically described in their entirety and use a programming language that is appropriate for the particular smart contract environment. This includes the requirements that are expected of all participating parties, as well as all the rules, rewards, and penalties associated with those terms.

3. Environment

In order for them to exist and function properly, smart contracts have to operate within a suitable specific environment. First, the environment must support the use of public-key cryptography, which allows users to clear the transaction using their unique and specially generated cryptographic codes. This is the exact system that the absolute majority of currently existing cryptocurrencies are using.

Second, they require an open and decentralized database, which all parties to the contract can fully trust and which is fully automated. Furthermore, the entire environment itself has to be decentralized so that the smart contract can be implemented. Blockchains, especially the Ethereum blockchain, are the perfect environments for smart contracts.

Lastly, the source of digital data used by the smart contract must be completely reliable. This involves the use of root SSL security certificates, HTTPS, and other secure connection protocols that are already in wide use and are being automatically implemented in the latest software.

4. Smart Contracts Offer:

Autonomy – Smart contracts eliminate the need for a third-party facilitator, essentially giving you full control of the deal.

Trust – No one can steal or lose any of your documents as they are encrypted and securely stored in a secure, shared ledger. Plus, you don’t have to trust the people you’re dealing with or expect them to trust you, as the unbiased smart contract system essentially replaces trust.

Savings – Notaries, real estate agents, advisers, assistance, and many other intermediaries are not necessary thanks to smart contracts. And, by extension, the extortionate fees associated with their services.

Security – If implemented correctly, smart contracts are extremely difficult to hack. In addition, the perfect environments for smart contracts are protected with complex cryptography, which will keep your documents safe.

Efficiency – With smart contracts you will save a lot of time, normally wasted in manually processing stacks of paper documents, sending them or transporting them to specific places, etc.

Read more: How Blockchain Technology Works?

Who Created them and Who uses them?

Smart contracts were first described by Nick Szabo, a computer scientist, and cryptographer, in 1996. Over several years, Szabo reworked the concept and published several publications, in which he described the concept of establishing legal-related business practices. contractual through the design of electronic commerce protocols between strangers on the Internet.

However, the implementation of smart contracts did not occur until 2009, when the first cryptocurrency, Bitcoin appeared along with its Blockchain, which finally provided a suitable environment for smart contracts. Interestingly, Nick Szabo designed a mechanism for a decentralized digital currency called Bit Gold in 1998. It was never implemented, but it already had many of the features that Bitcoin boasted about 10 years later.

Today, smart contracts are mainly associated with cryptocurrencies. On the other hand, it is fair to say that one could not exist without the other, and vice versa since decentralized cryptocurrency protocols are essentially smart contracts with decentralized security and encryption. They are widely used in most of the currently existing cryptocurrency networks and are the prominent and one of the most exaggerated features of Ethereum.

Read more: What is Ethereum?

Examples of Using Smart Contracts

While the stance of governments, financial regulators, and banks around the world regarding cryptocurrencies has ranged from extremely cautious to carefully accepted, the technology behind the – blockchain and smart contracts – has been widely accepted as revolutionary and is being implemented at all levels.

For example, recently, the Depository Trust and Clearing Corporation (DTCC) and four major banks – Bank of America Merrill Lynch, Citi, Credit Suisse, and JP Morgan – successfully negotiated credit default swaps on the Axoni-developed Blockchain. , using smart contracts. The smart contract used contained information such as individual business details and counterparty risk metrics, which, according to a press release, provided a new level of transparency for partners and regulators.

Similar things are happening everywhere. This month, a consortium of 61 Japanese and South Korean banks has been testing Ripple’s Blockchain and smart contracts to enable cross-border money transfers between the two nations. The new system will be rolled out in 2018. Even Sberbank, a Russian government-controlled bank, in a country that has been notoriously anti-cryptocurrency, the Ethereum blockchain and the smart contracts enabled by it are being tested.

The tests were conducted keeping in mind that Sberbank joined the Enterprise Ethereum Alliance, a consortium of more than 100 companies, including blue-chip companies like Cisco, BP, ING, Microsoft, etc. The objective of the Alliance is to develop a Blockchain tuned for business use, in which the smart contracts necessary for certain companies can be developed and implemented.

As smart contracts were developed in association with cryptocurrencies, they are still being mostly implemented in the world of finance and banking. However, this technology can be used by governments around the world to make the voting system more accessible and transparent. Supply chains can use it both to monitor goods and to automate all the tasks and payments involved. Real estate, healthcare, taxes, insurance, and countless other industries can all benefit from smart contract implementation and the benefits they offer.


Smart contracts are an extremely young technology. Despite having many promises, you can still be prone to problems. For example, the code that makes up the contract has to be perfect and not contain errors. This can lead to errors and sometimes these errors are exploited by scammers. As in the case of The DAO Hack, money deposited into a smart account with a bug in its code can be stolen from it.

Furthermore, the novelty of technology continues to raise many questions. How will the government decide to regulate these contracts? How will they be taxed? What happens if the contract cannot access the object of the agreement, or if something unexpected happens to you? If this happened when a traditional contract was made, it could be rescinded in court, but the Blockchain makes the contract work no matter what happens, in accordance with the “The Code is Law” policy.

However, most of these problems exist simply because of how young smart contracts are as a technology. With such a promise, the technology is sure to improve over time. Smart contracts are undoubtedly about to become an integral part of our society.