What is a Smart Contract and how is it applied in life

How smart contracts work

About one of the main advantages of blockchain technology is the ability to create Smart Contract. However, not every cryptocurrency investor fully understands the importance of this opportunity.

It is necessary to find out what a smart contract is? what types of them exist at present, and by what principle their functioning is going on, and also to consider the scope of their application.

What is a smart contract in simple words

A smart contract is a self-executing computer code that is written to a blockchain. A decentralized chain of blocks stored on many computers.

In simple words, a smart contract is an element of a network based on blockchain technology. That checks the parameters specified in it and, if they are followed, automatically executes the contract, exchanging assets between the parties.

Thanks to smart contracts, the problem of trust between counterparties is solved and the participation of intermediaries in transactions is excluded.

Wikipedia says that a smart contract is a computer algorithm designed to conclude and maintain commercial contracts in blockchain technology.

Such algorithms can significantly simplify life when working with counterparties on the blockchain network. Since smart contracts take the responsibility of verifying the integrity of the counter transaction.

Smart contracts are completely safe for both parties. Participants do not risk being deceived, ambiguously interpreting the terms of the document.

Participants, having concluded a smart contract, can exchange assets without third parties. They receive the required automatically.

Types of Smart Contract

There are currently three types of smart contracts.

Fully automated

The code of this contract contains all stages of execution, which automates the entire process.

Partially Automated

This type of contract is for the most part presented in a classic paper version. Only some of its elements are automated in the blockchain system. Often, the settlement part of the contract is automated.


This type includes fully automated contracts, also legally executed in the classic paper version.

Blockchain technology and digital contracts based on it have come into use relatively recently. Because of which their use is only being perfected and improved at the moment.

These days practically no truly complex smart contracts are used, and most of them are partly automated because the technology has not yet earned massive trust.

How smart contracts work

The development of smart contracts takes place in the blockchain system. Its content is placed in the program block, from which entry and exit points are made. This allows the smart contract to work with information outside the blockchain, including performing any actions.

For the contract to work, it is necessary that, when using it, the parties to the contract apply electronic signature technologies. That is used to sign transactions on the blockchain network.

For the smart contract to work effectively, precisely prescribed conditions for the execution of the contract are required. Otherwise, the process automation will not be possible

Smart contracts also receive information from outside the blockchain through the use of oracle programs. That mediate external databases with honey and are inscribed in the blockchain contract.

The main principle of the smart contract is the reliability of the prescribed conditions, as well as the full automation of this process.

Where smart contracts and life examples are applied

It is believed that the potential for use in smart contracts is extremely high. However, their use is possible in many areas of life:

  1. Accounting
  2. Logistics
  3. Finance
  4. Law
  5. Real estate transactions
  6. Personal identification
  7. Crowdfunding
  8. Elections

This is an incomplete list of areas where smart contracts can be applied. The possibilities of their application are very wide. Their use is possible wherever it is possible to carry out a certain standardization of the terms and conditions of concluded contracts and to verify their compliance by connecting to external resources.

Nowadays, there are even such projects as an autonomously functioning pyramid on a smart contract that carries out payments in automatic mode.


Currently, there are examples of smart contracts with which complex transactions are already being implemented. Through one of the services, an apartment was bought and sold in Ukraine when the buyer was in the USA.

In this case, They used Ethereum smart contract to verify the conditions for re-registering property. After receiving data from the registry, the contract unlocked the seller access to payment blocked on the account. As a means of payment, Ethereum cryptocurrency was used.

Also, a good example of the use of smart contracts can serve as a game on the sweepstakes. Two people contribute to the blockchain information about their bets, as well as the funds that they put.

To determine the winner and pay remuneration without the participation of a third party, you need a smart contract that will determine the outcome of the match, check betting information with real data and unlock access to funds for the winner.

The use of smart contracts is possible when purchasing goods via the Internet – the contract unlocks the funds for the seller only after confirming receipt of the goods from the courier service.

Another way to use smart contracts in life is to execute a will. Upon receipt of the death certificate of a party to the contract, the latter automatically initiates the transfer of property to the heirs according to the will.

Currently, there is the opportunity to create even a smart contract for ICO, that monitor the progress of the sale.

For this, a token smart contract can be developed previously, which will determine its output parameters at the time of generation.

How to create a smart contract

To create a smart contract, you must first know the programming language.

Creating entry-level smart contracts is possible without deep knowledge. But more complex contracts are best left to professional developers. Next, you need to select the blockchain in which the contract will be located.

Currently, the most popular are smart contracts Ethereum, where there is a language Solidity. However, a remix is ​​used for editing and drafting a contract.

Here is a standard simple example of writing a contract:

contract MyToken {
/ * This creates an array with all balances * /
mapping (address => uint256) public balanceOf;
/ * Initializes contract with initial supply tokens to the creator of the contract * /
function MyToken (
uint256 initialSupply
) public {
balanceOf [msg.sender] = initialSupply; // Give the creator all initial tokens
/ * Send coins * /
function transfer (address _to, uint256 _value) public returns (bool success) {
require (balanceOf [msg.sender]> = _value); // Check if the sender has enough
require (balanceOf [_to] + _value> = balanceOf [_to]); // Check for overflows
balanceOf [msg.sender] – = _value; // Subtract from the sender
balanceOf [_to] + = _value; // Add the same to the recipient
return true ;

However, for a person who is far from programming, the independent implementation of this item will not be possible. That’s why the specialized Etherparty platform was created. It solves the problem of how to create a smart contract, being a beginner in the industry. The program allows you to simplify the creation of smart contracts for those who are not good at programming. Thus, the basis for creating a smart contract is the correct introduction of its parameters into the system code.

Cryptocurrencies with smart contracts

The main blockchain for creating smart contracts at the moment is Ethereum. Air is the most convenient for this activity. But other networks provide the opportunity to develop smart contracts. In the blockchain of bitcoin and its forks, the creation of simple contracts is possible.

The second most popular blockchain for creating smart contracts is NEO.


This platform supports such common programming languages ​​as Python and Java. It is a little similar to the Ether, only the Chinese developed it. Therefore, this is such a Chinese Ether.

This network is not so popular yet, however, for writing contracts for NEO. It is possible to use more common programming languages ​​than on Ethereum.


Sawtooth is the latest platform offers writing contracts in the Solidity language.


Cardano positions itself as a third-generation platform. While Ethereum is considered a second-generation blockchain. Given this, Cardano does not seek to compete with Ether.

The NXT blockchain does not provide for the possibility of creating smart contracts on its own but provides a choice of existing ones.

How smart contracts appeared on the blockchain

Back in the middle of the last century, the scientist and cryptographer Nick Szabo described such agreements. Quote: “this is an electronic data transfer protocol that ensures the fulfillment of contract terms by all parties.”

However, the creation of such an agreement was impossible in the conditions of that time. And therefore this idea was waiting for its time. In 2008, when bitcoin and blockchain appeared, smart contracts began to be implemented.

The functionality to create the first contracts was laid down in the protocol of the Bitcoin network. However, this system was imperfect and was practically not used.

Only here, the capabilities of the Bitcoin blockchain do not allow a smart contract to be fully embodied in electronic life. However, very limited algorithms can be programmed on this platform. Therefore, the developers were looking for other ways. This was the platform – Ethereum. Created by Vitaly Buterin. Developers were able to run applications without blockchain. All thanks to turning the language in which it is written. While the bitcoin network is not complete according to Turing.

Since the launch of Ethereum, the development of smart contracts began in full swing.

Pros and cons of Smart Contract

Like any technology, smart contracts have their pros and cons.

Advantages of smart contracts

  1. Reliability and immutability provided by a decentralized data storage system in the blockchain.
  2. The transparency of actions in the system, coupled with the confidentiality of the parties to the contract, is also achieved thanks to the principles of decentralization of the network.
  3. Automation.
  4. The lack of human factors.
  5. Cost reduction due to exclusion from the chain of intermediaries.
  6. High execution speed due to the use of mathematical algorithms instead of bureaucratic mechanisms.

Disadvantages of smart contracts

  1. Weak legal regulation of the use of smart contracts.
  2. The need to address the issue of transaction processing speed and scalability in the blockchain system.
  3. Inability to adjust. Although this increases the security of contracts. But if an error was made during data entry, it will not be possible to make changes to the progress of the contract.
  4. The possibility of crowding out a whole category of administrative employees previously involved in transaction processing by automated processes.
  5. Inability to transfer sensitive data through open smart contract registries.
  6. High dependence on the level of programmers and exposure to bugs.

Despite all the shortcomings, smart contract codes are developing every year. And the technology itself is becoming increasingly widespread.


Currently, the use of smart contracts is possible in many areas, which can help improve the speed of these areas, and also exclude the influence of intentional or accidental human factors from their work.

A smart contract is an algorithm that automatically checks and fulfills specified conditions and is located in a decentralized blockchain network.

Creating smart contracts requires an excellent knowledge of programming languages, but the result that the whole society can get from the development of this technology is worth the cost of its development and improvement. That is why, despite the presence of a considerable number of shortcomings, the technology of smart contracts is gaining more and more popularity around the world.

FAQ Smart Contract

What is Smart Contract?

The Smart contract is a computer algorithm for generating, controlling and providing information on the ownership of anything.

How smart contract works

Smart contracts are automatically executed once the conditions of the agreement are met. This means there is no need for a third party, like a bank, a broker or a government.

Why smart contracts are needed

Smart contracts make life easier for users. At the same time, they eliminate intermediaries in the person of banks, lawyers and notaries, and at the same time guarantee the security of the transaction.

Leave a Reply