February 1, 2023
Source: DappWorks

What Are Smart Contracts?

Smart Contracts are digital contracts that automatically execute when certain conditions are met and are stored on the Blockchain. The deal execution process is fully automated, transparent, traceable, reversible and does not need to go through a third party.

Terms of Smart contracts are similar to Legal Contracts but written in the form of a programming language.

Nowadays, smart contracts are still popular in the cryptocurrency industry, mainly for the exchange of cryptocurrencies. But it is not limited to cryptocurrencies and in fact many insurance and real estate companies are adopting this standard protocol for better scalability at a cheaper rate. In short, smart contracts are an essential component for many platforms. That is why it is important to understand what smart contracts are and how they work.

How Do They Work?

In simple terms, Smart Contract acts like a deterministic program. Smart Contracts will execute a specific task in case certain conditions are satisfied. Therefore, a Smart Contract system usually follows “if…then…” statements.

On Ethereum, Smart Contracts are responsible for executing and managing the activities that take place on the blockchain when users (addresses) interact with each other. Any address that is not a smart contract is called an Externally Owned Account (EOA). Therefore, the smart contract will be controlled by the computer and the EOA controlled by the user.

Smart Contract Ethereum consists of a contract code and two public keys:

  • The first public key is the one provided by the contract creator.
  • The other key represents the contract itself, which acts as a unique digital identifier for each Smart Contract.

Smart Contracts are implemented via blockchain transactions and they are only activated when an Standalone Account (EOA) or other Smart Contracts call them. However, the first trigger is always from the EOA (user) side.

The operation of a smart contract can be simulated step by step as follows:

How smart contracts work

  • Step 1 – Pre-program the contract: The conditional sentences of the agreement in the contract such as: “If / When…” are put into the Blockchain into Code – a programming language
  • Step 2 – Chain of Action: If the condition is satisfied, the Smart Contract will be executed
  • Step 3 – Execution & Transfer of Value: Once the transfer is made, the terms of the contract are automatically codified and transferred to the parties involved
  • Step 4 – Complete: The completed transaction will be updated on the blockchain and cannot be changed. Only authorized parties can view the results

Smart Contract Vs. Traditional Contract

Some of the unique features of traditional contracts include:

  • Created by legal experts
  • Compilation of a large amount of documents
  • Requires a third party to execute
  • It took quite a while to agree and sign
  • Contracts can have many problems and can be unclear
  • It takes a lot of money and has to rely on the justice system to solve the problem

The similarity between a traditional contract and a smart contract is that the terms and penalties are clearly stated.

However, smart contracts have differences such as:

  • Created by programming language like C++, Go, Python, Java on computer system
  • The entire code is executed by Blockchain distributed ledger system
  • No need for a third party intermediate
  • Ensure transparency and accuracy in enforcement

Smart Contracts

Pros And Cons


  • The application of smart contracts can be used in many different fields: Logistic, banking, real estate, election,…
  • Freedom: Do not accept the management of any agency
  • Minimize risks from third parties
  • Safe and transparent
  • Economical and fast


  • Risks from the Internet: Can be attacked or exploited by hackers if they reveal important information
  • Do not receive legal rights: Interests may not be protected because there is no policy
  • High requirements on the implementation level of programmers and systems. From there, the cost to pay them and the infrastructure is not small

Real-world Smart Contract Examples

Smart contracts use cases

Insurance company AXA is one example of a business that has trialled using smart contracts.Their product, named Fizzy, used smart contracts to provide customers with direct, automatic compensation in the event that a scheduled flight was delayed by two or more hours.

Music streaming platform Inmusik allows the use of smart contracts to ensure fair allocation of revenue earned through streaming. Ownership rights to a song are validated through the Inmusik blockchain, and revenues are allocated accordingly.

Factom is a blockchain development company that aims to revolutionise the way patient information is stored within the healthcare industry. By storing medical data within the blockchain, information is accessible only by hospitals and healthcare administrators, greatly enhancing the security of confidential information.

ATLANT is a blockchain company which looks to facilitate the tokenisation of assets, meaning the issuing of a digital token which represents a physical asset such as a work of art or a property. Once tokenised, these assets can be traded in a similar fashion to stocks and shares, allowing transactions to be completed online.

Disclaimer: This is not financial advice. This article is for informational and sharing purposes only.