Contracts govern most aspects of our professional and personal lives, and they are essential to the functioning of modern society.

In the Blockchain, Smart Contracts play a vital role, they help to make the transactions that take place more safe and secure and operate in an organized manner. And that’s not all, it helps other components like apps running on these platforms to be even more accessible. But what is a smart contract?

What is a smart contract?

  • Smart contracts are self-executing contracts in which the content of the buyer-seller agreement is written directly into lines of code.
  • According to Nick Szabo, an American computer scientist who designed a virtual currency called “Bit Gold” in 1998, smart contracts are computerized transaction protocols that execute contract terms.
  • Their use makes transactions traceable, transparent and irreversible.

Benefits of smart contracts

Accuracy, speed and efficiency

  • The contract is immediately executed when a condition is met.
  • Since smart contracts are digital and automated, there is no paperwork to deal with, and
  • No time is spent correcting errors that may occur when completing documentation by hand.

Trust and transparency

  • There is no need to worry about information being tampered with for personal gain, as no third party is engaged and
  • encrypted transaction logs are exchanged between participants.


  • Because blockchain transaction records are encrypted, they are extremely difficult to hack.
  • Also, because each entry in a distributed ledger is linked to the entries before and after it, hackers would have to modify the entire chain to change a single record.


  • Smart contracts eliminate the need for intermediaries to complete transactions, and the associated delays and fees.

How do smart contracts work?

A smart contract is a kind of program that encodes business logic and runs on a dedicated virtual machine integrated with a blockchain or other distributed ledger.

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

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

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

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

Step 5 : An in-house expert or a company specializing in smart contract security monitoring can be used.

Step 6 : The contract is then deployed to 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 actually a cryptographically secure streaming data source, once it has been deployed.

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

Smart contract and theft insurance

Consider a real scenario where smart contracts are used. Rachel is at the airport, and her flight is delayed. AXA, an insurance company, offers flight delay insurance using Ethereum smart contracts . This insurance indemnifies Rachel in such a case. How ? The smart contract is linked to the database recording the status of flights. The smart contract is created based on the terms and conditions.

The condition set for the insurance policy is a delay of two hours or more. Based on the code, the smart contract withholds money from AXA until that certain condition is met. The smart contract is submitted to the nodes on EMV (a runtime compiler to run the smart contract code) for evaluation. All nodes in the network that execute the code must arrive at the same result. This result is recorded in the distributed ledger. If the flight is delayed for more than two hours, the smart contract automatically runs and Rachel is compensated. Smart contracts are immutable; no one can change the agreement.

how a smart contract works in cryptocurrencies

Smart contract voting and implementation

Using Blockchain in the voting process can eliminate common problems. A centralized voting system faces challenges when it comes to tracking votes – identity fraud, counting errors, or poll worker bias. By using a smart contract, certain predefined conditions are pre-established in the contract. No voter can vote from a digital identity other than his own. Counting is infallible. Every vote is recorded on a blockchain network, and counting is done automatically, without third-party intervention or reliance on a manual process.

Each identifier is assigned to a single vote. Validation is performed by users on the blockchain network itself. Thus, the voting process can take place on a public blockchain or on a decentralized blockchain based on an autonomous organization. Therefore, each vote is recorded on the ledger, and the information cannot be changed. This register is publicly available for auditing and verification purposes.

Smart contracts allow you to create voting systems where you can add and remove members, change voting rules, change debate periods, or change majority rule. For example, you can create a vote for a decision within a decentralized autonomous organization . Instead of a central authority making a decision, a voting mechanism within the organization can determine whether the proposal is accepted or rejected.

Implementation of a smart contract on a blockchain and crowdfunding

Ethereum-based smart contracts can be used to create digital tokens to perform transactions. You can design and issue your own digital currency, creating a tradable computerized token. The tokens use a standard currency API. In the case of Ethereum, there are standardizations of ERC 2.0, allowing the contract to automatically access any exchange wallet. Therefore, you are building a tradable token with a fixed supply. The platform becomes a sort of central bank that issues digital currency.

Suppose you want to start a business that requires financing. But who would lend money to someone they don’t know or trust? Smart contracts have a major role to play. With Ethereum, you can build a smart contract to hold back a contributor’s funds until a specific date has passed or a goal has been met.

Depending on the outcome, funds are released to contract owners or returned to contributors. The centralized crowdfunding system has many problems related to management systems. To combat this, a DAO (Decentralized Autonomous Organization) is used for crowdfunding. The conditions are defined in the contract, and each person participating in the crowdfunding receives a token. Each contribution is recorded on the blockchain.

Limits of smart contracts

  • Since smart contracts cannot send HTTP requests, they cannot acquire information about “real world” events. It is a deliberate choice.
  • Using external data could compromise consensus, which is essential for security and decentralization.

Use cases for smart contracts

  • Use cases for smart contracts range from simple to complex.
  • They can be used for simple economic transactions, such as moving money from point A to point B, as well as for intelligent access management in the sharing economy.
  • Smart contracts could disrupt many industries.
  • Banking, insurance, energy, e-government, telecommunications, the music sector, art, mobility, education and many other sectors have use cases.

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SAKHRI Mohamed

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Passionate about the web, new technologies and IT, I share on tutorials, tips, advice, online tools and software for Windows, Mac and Linux.

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