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What Are Smart Contracts?

What are smart contracts?

Crypto users refer to Blockchain and Smart contracts as hand-in-hand structures, completing each other’s operations.

The blockchain, which has dramatically developed in recent years, contains functionality called “Smart Contract,” which is essential to all the activities taking place on the blockchain. But what is a smart contract?

A smart contract is a digital contract programmed to run on the blockchain when users fulfill certain conditions.

It’s a self-executing program that runs on the agreement between two or more parties. The program controls the execution of trade between seller and buyer on the blockchain. 

Smart contracts automate trusted transactions and agreements carried out between anonymous participants without any intermediary. They are also programmed to permit an agreement workflow: actions to occur when users meet different conditions.

How Smart Contracts Work

A Smart Contract follows the simple logic of “if/when…then…” When creating a smart contract, developers work with project owners to specify contract requirements, so as to activate behaviors for specific events or circumstances.

These events may be the authorisation of payments, the release of funds to appropriate parties, platform utilisation, or other sophisticated processes like derivative financial instrument calculation and trade of derivative process.

A network of nodes executes the events when specified conditions have been met and acknowledged. The blockchain registers it as a completed transaction and records it. After this, the transaction becomes unalterable but is transparent to any party who has access.

Smart Contracts in Action

A Smart Contract is not just another piece of code written to run an application. It is there to verify, validate, and enable transaction data storage on Blockchain. Here’s an example of a Smart Contract in crowdfunding actions.

  • A smart contract is written to work with the project owner’s contract requirements, which is to receive funds from investors only if certain conditions are met.
  • When they are uploaded on the Blockchain, investors can now send funds (in ETH) to the smart contract. Since they are distributed across the network, and there is no single owner to the funds, it records the funds with all the nodes in the Ethereum network.
  • The funds will be released to the project owners when the conditions are met with the requirements set beforehand. However, if the requirements are not met, the funds will be held or returned to the investors.
  • In the smart contract, nodes computing and validating transactions will earn from the transaction fee (gas fee) charged by the Contract. In the Ethereum network, the transaction fee is Ether (ETH). 

Smart Contracts plays an essential role in other vital sectors, such as insurance, finance, gambling, logistics, real estate, and many other industires.

Benefits of Smart Contracts

Speed, Efficiency, and Accuracy

Smart contracts immediately respond to the blockchain’s trigger when an event is established. They are digital contracts that require no paperwork or intermediaries, thereby reducing error risk.


No intermediary is involved in any of its operations for all the transactions and business processes taking place on the blockchain-based smart contracts.

The participating nodes can access and validate the encrypted blocks of transactions, making the transaction unalterable and transparent.


Each block of validated transactions is encrypted cryptographically to avoid cyberattacks. Since a history of the transaction, which involves the connection between previous transactions and subsequent ledger on a distributed ledger, is created every time a new block is created, hackers would have no means of accessing one block without disrupting the entire record.


They remove the need for third parties to handle transactions, which saves transaction costs that would have been imposed. 


Since smart contracts work as digital contracts, incorporating them on the blockchain makes blockchain technology flexible. Any data can be stored on the blockchain, and its transaction can be through various smart contracts.

Essentially, Smart Contracts help make digital assets transactions safe, efficient, cost-effective, and reduce transaction costs.

Limitations of Smart Contracts

While there is plenty of importance to implementing a Smart Contract into your operations, it has a few drawbacks. The following are limitations of Smart Contracts:

Unflexible: Difficult to change 

Changing their processes is often challenging. For example, logic-based execution is always not implemented in law sectors. Smart contracts fail to offer utility to that sector.

Delayed transactions and the possibility of loopholes

There are instances when congestion on the blockchain network can result in delayed transactions by charging high processing fees ( transaction fees). It will be challenging to ensure that the contract’s requirements are met.


Although smart contracts are implemented to eliminate third-party operations, it is impossible to eliminate third-party services as they change roles.

For instance, smart contracts, lawyers will not be needed to prepare contracts, but they will need to explain the terms and conditions necessary for developers to know to upload a smart contract on the blockchain.


The future of smart contracts is intriguing and can go beyond the transfer of assets on the blockchain. They are complex and can execute transactions in various sectors, from consumer goods to transportation to legal industries.

They can automate and simplify all business and legal processes to avoid the repetitive price paid for the operations.

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