Know All About Smart Contracts!

Prateek Majumder 25 Jul, 2022 • 7 min read

This article was published as a part of the Data Science Blogathon.


Most professional and personal life elements are governed by contracts and agreements, which are crucial to the smooth operation of contemporary society. Smart Contracts are significant since they contribute to the organisation and safety of the transactions going place. Not only that, but it also makes other parts, such as programmes operating on these platforms, more accessible.

Automation is increasingly necessary for every industry, as organisations strive to maximise revenues while keeping expenditures as low as possible. Another reason businesses seek automation is to eliminate human mistakes and make the process as efficient as feasible. Clearly, there are several technologies that allow businesses to do precisely that. Smart contracts are used to automate processes. They are crucial to automation.

A decentralised programme that runs business logic in response to events is called a smart contract. Executing a smart contract may lead to a currency exchange, the provision of services, the decryption of content subject to digital rights management, or other data modification, such as renaming a land title. By enabling the selective release of data that is privacy-protected to fulfil a specific request, for example, smart contracts may be used to enforce privacy protection.


Self-executing contracts known as “smart contracts” are those in which the terms of the buyer-seller contract are written directly into lines of code. The programmes that support smart contracts may be created, distributed, maintained, and updated using many architectures. They can be included in different payment methods and digital exchanges. These include those that accept bitcoin and other cryptocurrencies and are kept as a component of a blockchain or other distributed ledger technology.

Smart Contracts

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  • Smart contracts, despite their name, are not enforceable contracts. Their primary duty is to programmatically carry out business logic, which has been programmed into them to carry out certain activities, processes, or transactions in response to a specific set of criteria. Legal action must be taken to connect this execution to legally enforceable agreements between parties.
  • They also support cryptocurrency and digital token transfers. Other cryptocurrencies, like bitcoin, may be transferred under the control of smart contracts. Upon payment confirmation, bitcoin can be transferred from a seller to a buyer.
  • Company executives who may not be keeping up with blockchain advancements should think about researching the technology and assessing how it might be used with smart contracts to create new business capabilities or increase efficiency. Operations executives should assess where smart contracts could be useful by looking at their own processes. Check for things like complexity and manuals.

Operations executives should assess where it could be useful by looking at their own processes. A few things to watch out for include multi-party agreements, complicated and laborious work routines, a lack of confidence between parties, and interconnected transactions. Similarly, developing new capabilities that smart contracts can enable should be considered in the context of ongoing innovation or strategy activities. Software development will change due to smart contracts, which constitute a new computing model.

How do smart contracts work?

A smart contract is a digital contract with a blockchain security code. A smart contract contains permissions and details defined in code that need to happen in a certain order to agree with the terms stated in the smart contract. In the contract, deadlines may be included due to time restrictions.

Since this contract is a part of the blockchain, it is transparent, unchangeable, reasonably priced, and decentralised. Every smart contract has a blockchain address. If the contract has been broadcast over the network, it may be contacted using its address.

Business teams first collaborate with developers to specify their expectations for the desired behaviour of the smart contract in response to different situations or events. This is the first step in the process of establishing a smart contract. Simple events might be conditions like an energy metre reading threshold, a payment authorization, or a package receipt. More complicated events may be encoded by more sophisticated logic. For example, calculating a derivative financial instrument’s value and completing a derivative deal or automatically disbursing an insurance payout in the case of a fatality or a natural catastrophe.

The developers then develop and test the logic on a platform for building smart contracts to ensure it functions as planned. The application is given to another team for a security evaluation once it has been written. This might be an internal specialist or a business that focuses on examining the security of smart contracts. The contract is implemented on an already-existing blockchain or other distributed ledger architecture after being accepted.

Blockchain-based smart contracts have a wide range of potential uses, from carrying out transfer pricing agreements between subsidiaries to verifying credit eligibility. Importantly, this form of smart contract was not conceivable before blockchain since the participants in such an agreement would have to maintain separate databases. The smart contracts auto-execute using a shared database that runs the blockchain protocol. Thus, all parties instantly confirm the result without needing a middleman.

How does it relate to blockchain?

Based on the blockchain, it might be advantageous for various sectors in their supply networks. The automation for healthcare payments helps lower overbilling and stop fraud. The music industry may employ a smart contract to ensure royalties are paid when music is utilised for commercial reasons after recording the ownership of music in the blockchain. Blockchain technology and smart contracts might help the car industry by storing easily accessible data on vehicle maintenance, accident history, and ownership.

 Advantages of using Smart Contracts

Smart Contracts benefits

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There are many advantages to using Smart Contracts. Let us have a look at them:

1. Speed and Efficiency

When a condition is satisfied, the contract is instantly put into effect. There is no paperwork to deal with, and no time was wasted fixing mistakes that might happen when filling out papers by hand. This is because smart contracts are digital and automated.

2. Record Keeping and Archives

The whole audit trail and all contract transactions are accessible and preserved in the blockchain in chronological order. To provide complete secrecy, the parties involved can be safeguarded cryptographically. This aids in keeping archives current.

3. Trust and Transparency

Since no third party is involved and participants share encrypted transaction records, there is no need to worry about data being altered for personal advantage. Smart contracts do away with the need for middlemen and enable open, direct communication with customers.

4. Security

Blockchain transaction records are exceedingly hard to attack since they are encrypted. Additionally, hackers would need to alter the entire chain in order to alter a single record on a distributed ledger. The reason being each entry is connected to the entries that came before and after it.

5. Prevention of fraud

The blockchain stores smart contracts. Given how computationally demanding the blockchain is, forcing changes to it is incredibly challenging. The nodes in the network can also identify smart contract violations. Hence, any such attempts are flagged as invalid and not recorded in the blockchain.

6. Failure Resistant

Since no single person or entity is in control of the digital assets. Here, one-party domination and the situation of one party backing out does not happen as the platform is decentralised. So even if one node detaches itself from the network, the contract remains intact.

7. More Trust

Contractual obligations are automatically carried out and upheld. These agreements are also unchangeable, unbreakable, and incontrovertible since they are immutable.


Just like the benefits, there are some disadvantages and limitations to using Smart Contracts. Let us have a look at some of these:

  • Smart contracts protect several essential components of a multiparty business process. However, because technology is so young, hackers are always finding new ways to jeopardise the goals of the companies that created the rules. The IEEE has also raised concerns regarding tool inconsistencies used to identify various smart contract security issues.
  • One oracle (one of the streaming data sources that transmits event updates) must be protected from hackers who create fake events to cause smart contracts to run when they shouldn’t. For complicated circumstances, it must be configured to properly create events, which might be difficult.
  • Regardless of whether they are consistent with the intention and understanding of all parties, smart contracts can speed up the execution of activities involving numerous parties. However, this skill has the potential to amplify the harm that might result when things go awry, especially when there is no means to curtail or unwind irrational conduct. The research group Gartner has emphasised that this problem raises issues with smart contracts’ management and scalability that have not yet been fully resolved.
  • The management and implementation of smart contracts are challenging. They are frequently set up in ways that make changes challenging or impossible.

Although this can be seen as a security benefit, the parties cannot modify the smart contract agreement or add new provisions without creating a new contract.


The promise of smart contracts extends beyond direct asset transfer, and they are complicated. They have the ability to carry out transactions in a variety of areas, including legal proceedings, insurance premiums, crowdfunding agreements, and financial derivatives.

Some of the key takeaways of this article are:

  • Smart contracts are lines of code that automatically verify and carry out the contract conditions between a buyer and a seller across a computer network.
  • Blockchains with smart contracts installed make transactions traceable, transparent, and irrevocable.
  • Smart contracts do not need centralised authority, a legal system, or an external enforcement mechanism.
  • Smart contracts enable trustworthy transactions and agreements to be made between dispersed, anonymous participants.

As they develop skills like adjudication of conventional legal contracts and configurable smart contract templates, the job of attorneys may also change in the future. Additionally, smart contracts’ potential for real-time audits and risk assessments, as well as their capacity to manage behaviour in addition to automating procedures, might be advantageous for compliance.

It may currently be used on many platforms, including Ethereum, Hyperledger, Tezos, and Corda. They are becoming increasingly common due to the increasing use of bitcoin and the backing of blockchain technology.

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Prateek Majumder 25 Jul 2022

Prateek is a final year engineering student from Institute of Engineering and Management, Kolkata. He likes to code, study about analytics and Data Science and watch Science Fiction movies. His favourite Sci-Fi franchise is Star Wars. He is also an active Kaggler and part of many student communities in College.

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