What are Smart Contracts in Blockchain?

Amey Band 06 Dec, 2022 • 10 min read

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


Smart Contract
Source: Image by Gerd Altmann from Pixabay

Smart contracts are blockchain-based computer programs that activate at predefined times. In most cases, they are used to eliminate the need for a third party during the execution of a contract, allowing all parties to the deal to know for sure what will happen without wasting time waiting on a mediator. They may also automate a process by automatically causing one action to lead to another.

Smart contracts are one of the most potentially useful applications of blockchain technology, and they can facilitate the transfer of everything from bitcoin and fiat currency to globally transported goods. Smart contracts are self-executing applications for business automation or an agreement between two parties encoded in computer code. They are stored in a public database and cannot be altered because they operate on a decentralized network such as blockchain.

Smart contract transactions are processed by the blockchain, allowing them to be sent automatically and without a third party. This indicates that no one can be relied upon!

There are no trust issues because the transactions only occur when the conditions of the agreement are met, and there is no third party.

When were Smart Contracts Invented?

Nick Szabo, a cryptographer, developed the idea in 1994 that recording contracts as computer code would be possible. As soon as certain conditions are met, the contents of this contract will become effective. Future reliance on reliable third-party firms, such as banks, may no longer be required due to this strategy.

How Does Smart Contract Work?

The logic of smart contracts is reduced to a series of “if/when/then” statements stored in the blockchain’s underlying code. When the prerequisites are satisfied and validated, the activities are carried out by a group of computers. For example, this can include distributing payments to the right people, registering a car, sending out alerts, or issuing a penalty. When the transaction is complete, the blockchain is updated. Thus, the deal is final and cannot be altered.

Smart Contract

1. Predefined Contract

Collaboration opportunities and desired results are identified by several parties, who then come to mutually beneficial agreements that may include the sharing of business processes, the exchange of assets, etc. The participants in a smart contract may choose to begin it. Collaboratively, the parties to the smart contract determine the conditions under which the contract should execute the intended actions.

2. Business Logic

A computer program is built that, after the conditional parameters have been satisfied, will run without any further intervention. Simple events include the authorization of a payment, the acceptance of a package, or reaching a certain threshold for the reading on a utility meter. It’s possible that more complicated processes, such as automatically releasing an insurance payout or assessing the value of a derivative financial instrument, may be encoded using more sophisticated logic.

3. Execution

After the contract is approved, it is next deployed on an already existing blockchain or distributed ledger architecture. When an agreement is formed between the parties about authentication and verification in a blockchain iteration, the code is then run, and the outputs are documented for compliance and verification. This happens anytime the consensus is obtained.

4. Settlement

After the execution of smart contracts, each node on the network will update its ledger to reflect the current status of the network. After the record has been uploaded to the blockchain network and confirmed, it can no longer be edited; it will only operate in add mode from that point forward.

How are Smart Contracts Created in Blockchain?

We’ll outline the essential processes of smart contract creation to offer you an overview. We won’t cover the coding, but we’ll explain how to write a smart contract. Creating a smart contract concept, developing, coding, and deploying the code require multiple steps. Let’s Start!

1. Concept

The first thing you need to do is decide exactly what you want your contract to include. What challenges are you looking to have solved by an intelligent and automated computer program? Having a clear idea of the result you want the coding process to produce is an excellent way to get started. This is true regardless of the demand you are trying to satisfy.

2. Code

Next, code your smart contract in a programming language. You’ll need an IDE to write your contract (IDE). The remix is a fantastic smart contract IDE, open-source desktop and web application. You can write Smart contract code in Ethereum’s Solidity programming language in Remix. Remix’s rapid development cycle and usable plugins are advantages.

3. Testing

After coding, test your smart contract. Testing is crucial. Once on the mainnet, you can’t change smart contract errors. Tenets (or test chains) are used to test smart contracts. These don’t need cryptocurrency, thankfully. Use dummy currency to test your contract and receive fast feedback. Testing tools are available. Remix simplifies testing and deployment with integrated environments.

4. Compile

Smart contracts need to be built before they can be used. What this means is making a JSON file out of your contract’s code so that it can be read by any old web app. Let’s look at a smart contract built on Ethereum as an example. After being written in Solidity, your contracts are compiled into the bytecode of the Ethereum Virtual Machine (EVM), which makes them compatible with any network that runs the EVM.

5. Deploy

Finally, deploy your contract on your network. Smart contracts are executed and transactions are made utilizing actual crypto when deployed. You’ll specify wallets and incentives. After this step, your deployed contract will launch, and all programmed functionalities will activate when the criteria are satisfied.

6. Follow-up Checks

After you’ve signed, deployed, and put your contract on the mainnet, you’ll need to do your due diligence to make sure it’s working the way it should. This includes keeping an eye on your wallets to make sure they show the right amounts at the right times. Additionally, now is the time to handle any storage concerns and maintenance responsibilities.

Benefits of Smart Contract

1. Speed, Efficiency, and Accuracy

As soon as the precondition is satisfied, the contract is instantly put into effect. There is no need for documentation or time-consuming reconciliation when dealing with smart contracts since they are digital and automated.

2. Trust and Transparency

Since there is no middleman and all participants have access to the same encrypted logs of transactions, it is impossible to tell whether any data has been changed for malicious purposes.

3. Security

Because the records of transactions in a blockchain are encrypted, it is very difficult to get into them. In addition, in a distributed ledger, each record is tied to the record that came before it and the record that will come after it. This means that hackers would need to modify the whole chain to change a single record.

4. Savings

Because they remove the need for middlemen in business transactions, smart contracts result in cost savings. In addition, the amount of money spent on the documentation is negligible to nonexistent.

Industrial Applications of Smart Contracts

1. Insurance

Processing claims is an annual expense for the insurance business that runs into tens of millions of dollars. In addition to this, the company loses millions of dollars every year due to bogus claims.

In addition to being able to support the original insurance policy, smart contracts assist in many other ways that help enhance the process of claim processing. They might permit mistake checks and establish payment amounts based on a set of criteria that takes into consideration the kind of policy that was carried out by the person or organization in question.

Once again, the primary advantages of using smart contract technology are that it cuts down on processing times, lowers expenses, and results in a significant drop in the number of mistakes.

In the future term, smart contracts might be used in conjunction with Internet of Things-enabled automobiles to enable pay-as-you-go insurance coverage and the prompt activation of claims after an accident. This would be possible via the usage of Internet of Things-equipped vehicles.

It is possible to instantly process information such as driver’s licenses, driving records, accident reports, and policy details to permit prompt reimbursements, which would be to the advantage of both parties.

2. Government

Smart contracts are useful because they facilitate the automation of procedures. The government might likely benefit much from this kind of activity management. Transferring property in a transparent and orderly way is essential to the process of registering land ownership. Smart contracts may be used to facilitate this. Using it will also increase transparency across the system while decreasing the cost of audits.

One more example of a use case, this time for the government, including applications such as electronic record filing, electronic elections, and digital identities that we covered before.

3. Supply Chain Management

Smart contracts may greatly benefit the supply chain by streamlining transactions and reducing human error. It may be put to use, for instance, to keep tabs on products through the supply chain. When a company uses supply chains enabled by smart contracts, it may get a far more accurate count of its stock.

It also benefits the company in ways unrelated to supply chain management. Smart contracts also imply less time spent verifying and tracking down lost or stolen items. However, to make it work, the institutions will need to integrate new machinery into their supply chain, such as sensors. What’s more, it serves as a demonstration of a smart contract in action.

4. Medical Research

Advantages comparable to this will accrue to the medical research sector. For starters, medical records and other sensitive information might be safely moved between departments or research institutes using blockchain technology for encryption.

Patient’s medical data must be kept confidential since many of them are dealing with personal health issues they’d rather not discuss. Medical research companies also have a huge amount of sensitive information, like test results and drug formulas, that needs to be kept safe.

If they have to give any of this information to a third party, smart contracts could keep it safe while it’s being sent. Only one use of smart contracts on the blockchain shows promise for improving healthcare research significantly.

5. NFTs and Gaming

The global gaming industry is an ecosystem that is worth $100 billion and continues to grow quickly. However, the way that value is created and shared within the industry can be unfair at times. Game designers make and release their games, and people pay money to play and interact with them. Because of this, a one-way flow of value is maintained, in which players must spend actual cash to get access to more in-game assets and gameplay options. On the other hand, if blockchain technology is used in games, players may be able to get more out of their in-game investments.

6. Decentralized Finance

Decentralized finance (DeFi) dApps are a strong alternative to traditional financial services, and they are becoming more popular because blockchain and smart contract technology are trustworthy, can’t be changed, and are clear. DeFi dApps offer similar services to banking and financial services, like lending, borrowing, trading, and many other financial services. They also offer completely new types of goods and decentralized business models that may give consumers a lot of value and profit. Smart contracts make things more clear, which could make it easier for people all over the world to get into the financial services industry through dApps.

7. Real Estate

The use of smart contracts can be used to record who owns a piece of property. The use of smart contracts is not only quicker but also more cost-efficient, which makes them a far superior option to the systems that are now in place. It also means that they can be used to register ownership of buildings, land, phones, watches, and other similar items.

When it comes to the real estate market, using smart contracts could eliminate the need for more expensive services like those of lawyers and real estate agents. Because of this new technology, for the first time in history, sellers now have the power to manage the transaction on their own, without any assistance from a third party.

8. Escrow

Escrow services let the parties to a contract keep valuables safe while the contract is in effect. The payer initiates the process to disburse the money for this purpose. However, if a smart contract is used, the whole process may be automated after the service provider has submitted its work and it has been authenticated.

Smart contracts may be especially helpful for freelance platforms that keep an escrow fund. Many businesses now rely on these digital agreements.

9. Identity Management

Existing technologies that are used to prevent crimes such as identity theft aren’t as successful as they should be since many of them do not provide the owner ultimate control of his data and the information that they choose to send out. This makes it easier for fraudsters to capture someone’s identity.

Individuals will have full control over their data and be able to share it however they want, thanks to digital identifier smart contracts that are built on distributed ledger technologies. This will make the system more secure and make it less likely that data will be mismanaged or stolen.

The protection of identities and the ease of conducting KYC checks are both helped by smart contracts.

10. Trade

Companies throughout the world are building a trustworthy network to facilitate international commerce. It is a blockchain-based platform that uses standardized trading rules and streamlined trading options to reduce friction and risk, make trading easier, and give businesses and institutions that use it more ways to trade.

11. Mortgage

There is potential for the application of intelligent contracts within the mortgage industry. It makes it possible to automate mortgages, which is convenient for the buyer as well as the owner. To make sure that all of these things happen, smart contracts need to be made based on the mortgage agreement. Once this is accomplished, the smart contracts may be activated, and the further steps of the process can be carried out in an automated fashion.

Limitations of Smart Contracts

Due to their inability to submit HTTP queries, smart contracts cannot get information on “real-world” occurrences. The importance of consensus for security and decentralization might be jeopardized by reliance on external information.

The maximum size of a smart contract is another constraint. If a smart contract exceeds 24KB, it will run out of gas.

Future of Smart Contracts

Undoubtedly, the future of relatively simple contracts that can be drafted and executed right away, provided preconditions are met is smart requirements-powered contracts. Numerous smart contract platforms will alter the supply chain and customer relationships while saving businesses across the world time and money. As a result, little human involvement will free individuals and important decision-makers from time-consuming administration and bureaucracy, allowing them to focus on their main duties. This is due to the smart contract’s ability to fill the gap.

Smart contracts are already used regularly by several banks and insurance organizations. As a result, smart contracts are already being evaluated in practical settings and will soon be incorporated into our everyday activities. Despite the aforementioned justification, there is still a long way to go until everything is governed by smart contracts.


The use of blockchain technology allows for the creation of smart contracts, which is one of its most appealing applications. Consider a smart contract to be analogous to a computer program that operates on “if-then” logic, also known as conditional programming. Blockchain functions as a form of database, validating that transactions have taken place, while smart contracts carry out pre-determined conditions. As you can see, the use of smart contracts has the potential to make the world a better place while eliminating the need for commissions. It has the potential to cut down on things like fraud and delays, as well as total costs.

Key Takeaways

Smart contracts are one of the uses of blockchain technology with the biggest potential utility. They are apps that automatically execute for business automation or a contract between two parties written in computer code.

The blockchain processes transactions, including smart contracts, enabling them to be delivered instantly and without a middleman. Because they are digital and automated, smart contracts eliminate the need for intermediaries in commercial transactions. Since the transaction records in a blockchain are encrypted, it is very difficult to hack into them.

A smart contract is akin to a computer program that uses if-then logic. It verifies that transactions have taken place, while smart contracts carry out predetermined conditions. If a smart contract’s size exceeds 24 bytes, it will run out of gas.

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Amey Band 06 Dec 2022

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