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What is a smart contract in blockchain and how does it work?

As an introduction to Blockchain technology, Smart Contracts play a very essential role, it helps to make the transactions taking place more safe and secure and function in an organized manner. And not just that, it helps other components like applications running on these platforms be even more accessible. But what is a smart contract?

Smart contracts are simply self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. The code is designed to verify that a transaction or contract is valid before it's added to the blockchain - this can be thought of as a form of automated escrow for financial transactions that ensures that everything goes according to plan.

What Is a Smart Contract?

  • Smart contracts are self-executing contracts in which the contents of the buyer-seller agreement are inscribed directly into lines of code. They are used to exchange money, property, shares and anything of value between parties under certain conditions.

  • According to Nick Szabo, an American computer scientist who devised a virtual currency called "Bit Gold" in 1998, Smart contracts are computerized transaction protocols that execute contract conditions. Using them makes the transactions traceable, transparent, and irreversible.

  • The term "smart contract" was first proposed by Nick Szabo in 1994. He described it as a set of promises, specified in digital form, including protocols within which the parties perform on these promises. The promise protocol can be executed with help of a deterministic computer system that runs with no possibility of downtime, censorship or fraud.

Benefits of Smart Contracts

Smart contracts are digital agreements that are automatically executed when certain conditions are met. They're extremely useful for transactions that require trust between two parties, but they can also be used to enforce contracts between businesses and consumers.

Smart contracts have the following benefits:


Smart contracts ensure that all terms of an agreement are met by both parties, because the contract is self-executing. Speed: Because smart contracts are digital and automated, there is no paperwork to deal with, and no time was spent correcting errors that can occur when filling out documentation by hand.


The contract is immediately executed when a condition is met. Because smart contracts are digital and automated, there is no paperwork to deal with, and no time was spent correcting errors that can occur when filling out documentation by hand. 

Trust / Transparency: 

There's no need to worry about information being tampered with for personal gain because there's no third party engaged in the transaction; encrypted transaction logs are exchanged among participants instead. Security: Because blockchain transaction records are encrypted, they are extremely difficult to hack—far more so than traditional methods of recording transactions.

How Do Smart Contracts Work?

A smart contract is a sort of program that encodes business logic and operates on a dedicated virtual machine embedded in a blockchain or other distributed ledger.

Step 1: Business teams collaborate with developers to define their criteria for the smart contract's desired behavior in response to certain events or circumstances.

Step 2: Conditions such as payment authorization, shipment receipt, or a utility meter reading threshold are examples of simple events.

Step 3: More complex operations, such as determining the value of a derivative financial instrument, or automatically releasing an insurance payment, might be encoded using more sophisticated logic.

Step 4: The developers then use a smart contract writing platform to create and test the logic. After the application is written, it is sent to a separate team for security testing.

Step 5: An internal expert or a company that specializes in vetting smart contract security could be used.

Step 6: The contract is then deployed on an existing blockchain or other distributed ledger infrastructure once it has been authorized.

Step 7: The smart contract is configured to listen for event updates from an "oracle," which is effectively a cryptographically secure streaming data source, once it has been deployed.

Step 8: Once it obtains the necessary combination of events from one or more oracles, the smart contract executes.

Use Cases of Smart Contracts

  • Smart contracts are a new type of software that can be used to automate the enforcement and performance of an agreement. In other words, they can be used to replace the need for legal contracts in many cases. 

  • Smart contracts can be used for simple economic transactions, such as moving money from point A to point B, as well as for smart access management in the sharing economy.

  • Smart contracts could disrupt many industries. 

  • Banking, insurance, energy, e-government, telecommunications, the music business, art, mobility, education, and many other industries have use cases.

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