What Are Smart Contracts In Blockchain? How Does It Work?

9 Feb 2024


Wikipedia explains “what are smart contracts in crypto” as “a computer program or a transaction protocol that is intended to automatically execute, control or document events and actions according to the terms of a contract or an agreement”. 

What Is A Smart Contract?

They are commonly employed to streamline the fulfillment of a contract, ensuring that all involved parties can promptly ascertain the result without the need for intermediaries or delays. Additionally, they have the capability to automate a sequence of tasks, initiating the subsequent step once specific conditions are satisfied.


Smart contracts were initially conceptualized back in 1994 by Nick Szabo, an American computer scientist known for creating a virtual currency named "Bit Gold" in 1998, a full decade ahead of the introduction of Bitcoin. It's worth noting that there have been speculations linking Szabo to the pseudonymous Bitcoin creator, Satoshi Nakamoto, who claims that he has refused.

Szabo's concept of smart contracts revolves around computerized transaction protocols designed to autonomously enforce contractual terms. His goal was to expand the capabilities of electronic transaction methods, such as point-of-sale (POS), into the digital realm.

In his research, Szabo also proposed the automation of contracts for synthetic assets, including derivatives and bonds. He articulated, "These novel securities emerge from the combination of traditional securities like bonds with financial derivatives like options and futures in various intricate ways. Highly intricate payment structures… can now be integrated into standardized contracts and traded with minimal transaction costs, thanks to computerized analysis of these multifaceted payment arrangements".

History Of Smart Contracts

It's important to note that smart contracts, as envisioned by Szabo, do not encompass the legal language or specific terms found in traditional contracts between parties. Instead, they consist of scripts featuring conditional statements (if/then), functions, module imports, and other programming elements that automate the actions specified within a contract.

Remarkably, many of Szabo's prognostications outlined in his paper have materialized even before the advent of blockchain technology. For instance, derivatives trading has largely transitioned to computer networks employing intricate payment structures.


Smart contracts extend their utility far beyond cryptocurrency trading, finding practical applications in diverse fields like financial services, IoT, and more.

In the realm of IoT, they offer a solution for secure and distributed access control, enhancing trust and reliability.

In employment contracts, smart contracts simplify record-keeping for employee details, salaries, and responsibilities, fostering transparency and trust between employers and employees. These contracts can be fully automated, partially automated alongside paper copies, or primarily paper-based, depending on the specific agreement.

For copyrighted content, smart contracts provide a clear framework for identifying valid content owners, ensuring proper royalty distribution, and clarifying rights and responsibilities throughout the creative process.


Smart contracts operate based on straightforward "if/when...then..." instructions embedded as code on a blockchain. Once predefined conditions are met and verified, a network of computers executes the specified actions.

These actions encompass various tasks such as disbursing funds to the appropriate parties, recording vehicle registrations, sending notifications, or issuing tickets. The blockchain ledger is subsequently updated upon transaction completion, ensuring its immutability, and restricting access to authorized parties only.

How Does Smart Contract Work?

Inside a smart contract, participants can include as many conditions as necessary to ensure satisfactory task completion. Establishing these terms necessitates participants agreeing on how transactions and their associated data will be represented on the blockchain, defining the "if/when...then..." rules governing these transactions, anticipating potential exceptions, and outlining a framework for dispute resolution.

Developers can then proceed to program the smart contract. Notably, organizations increasingly provide templates, web interfaces, and other online tools to simplify the process of structuring smart contracts for businesses, making adoption more accessible and efficient.


5.1. Swiftness, Efficiency, and Precision

Upon meeting the specified condition, the smart contract swiftly executes without delay. Thanks to the digital and automated nature of smart contracts, there's no need for time-consuming paperwork or the laborious process of rectifying errors often stemming from manual document completion.

5.2. Confidence and Openness

With no involvement of third parties and the distribution of encrypted transaction records among participants, concerns about data manipulation for personal gain become unnecessary. 

5.3. Enhanced Security

Blockchain transaction records are highly secure due to encryption, making them exceptionally resistant to hacking attempts. Additionally, because each record is intricately linked to prior and subsequent entries on a decentralized ledger, any alteration by malicious actors would necessitate tampering with the entire chain to affect a single record.

5.4. Cost Savings

Smart contracts eliminate the requirement for intermediaries in transaction handling, subsequently eliminating associated delays and fees, leading to cost savings.


Smart contracts, being versatile in executing agreements, find applications in various contexts. One basic use involves guaranteeing transactions between two parties, like buying and delivering goods. 

What Are Smart Contracts Used For?

For instance, a manufacturer procuring raw materials can establish payment terms via smart contracts, while the supplier arranges shipments. Depending on their mutual agreement, funds can then be automatically transferred to the supplier upon shipment or delivery.

Beyond this, smart contracts have diverse applications, including real estate deals, trading in stocks and commodities, lending, corporate governance, supply chain management, dispute resolution, and healthcare, among others.


The core advantage of smart contracts closely mirrors that of blockchain technology, as it eliminates the requirement for intermediaries. Additional merits of this technology encompass:

  • Enhanced Efficiency: Accelerated execution of contracts.
  • Unwavering Accuracy: Elimination of human error from the process.
  • Immutability: Resistance to any alterations in the programmed code.

However, smart contracts also come with certain drawbacks:

  • Permanent Nature: They lack flexibility and cannot be modified to rectify mistakes.
  • Human Dependency: Reliance on the programmer to ensure that the code aligns with the contract terms.
  • Potential Loopholes: Vulnerabilities in the coding may allow for contracts to be exploited or executed in a dishonest manner.


What Blockchain Has Smart Contracts?

Numerous blockchain platforms support smart contracts. Some of the most popular blockchain has smart contracts are:

  • Ethereum: Ethereum is arguably the most well-known blockchain for smart contracts. It was specifically designed to support them and has a robust ecosystem for decentralized applications (DApps).
  • Binance Smart Chain (BSC): Binance Smart Chain is another popular blockchain that supports smart contracts. BSC provides faster and cheaper transactions compared to Ethereum.
  • Cardano: Cardano is known for its focus on scalability, sustainability, and interoperability. It supports smart contracts through its Alonzo upgrade.
  • Tezos: Tezos is a blockchain platform with a focus on on-chain governance and formal verification. It allows smart contracts to be created and executed.
  • Polkadot: Polkadot is a multi-chain network that connects various blockchains. It enables smart contracts through parachains, which are specialized blockchains that can have their own smart contract functionality.
  • EOS: EOS is designed for high-performance decentralized applications and smart contracts. It provides a developer-friendly environment for creating DApps.
  • Avalanche: Avalanche is a platform known for its high-speed consensus protocol. It supports smart contracts and aims to provide a secure and highly scalable environment.
  • Algorand: Algorand is focused on speed and scalability while maintaining security. It supports smart contracts to be created and executed.
  • Tron: Tron aims to create a decentralized internet. It supports smart contracts and is known for its high throughput.
  • Solana: Solana is a high-performance, fast transaction speed and low fees blockchain. It supports smart contracts through its Solana Program Library (SPL).


The future of smart contracts is bright, with trends including widespread adoption across industries, interoperability between blockchain networks, integration with IoT for automation, growth in decentralized finance (DeFi), supply chain enhancements, evolving legal and regulatory frameworks, improved privacy and security measures, scalability solutions, and user-friendly tools. 

Sustainability and the integration of AI are also key considerations, promising to reshape industries and transform digital transactions and agreements. However, addressing challenges like regulation and scalability will be crucial for realizing their full potential.

We explored "What are smart contracts in blockchain?". These self-executing contracts, with their automated, trustless, and tamper-resistant nature, stand as a testament to the power of decentralized systems. As industries continue to adapt and explore the vast horizons that smart contracts offer, we witness the gradual shift from traditional, paper-based agreements to a digital, secure, and efficient future. 

While challenges and regulatory considerations persist, the promise of smart contracts in blockchain remains undeniable - a catalyst for innovation, transparency, and the reshaping of industries in the digital age.

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