What Are Smart Contracts on Blockchain?


Smart Contracts are taking the arena of blockchain technologies by storm. Platforms hosting smart contracts like Etherem, Solana, Cardano, etc., constantly make high revenues of 315% from their initial price.  To understand better how crucial are Smart Contracts on the blockchain, one needs to establish what smart contracts are on the blockchain in general and how they emerged.


What are Smart Contracts on Blockchain

Nick Szabo is considered to be the first who proposed the concept of Smart Contracts in 1996 when he was trying to promote his decentralized virtual currency called Bit Gold. In his words, they are “a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”In simple language, Smart Contracts are self-executing agreements between two parties where the terms are written in certain programming languages and smart contract code. The operations being the transactions then run in a distributed ledger, and they are only executed when the terms of the agreement are met. 

Surely the reason for the smart contract outrage is the package of advantages that it has against other technologies. Developers and investors turn to smart contracts mostly because there is no need for third-party intervention. A particular part also plays the scalable affordability of the transactions costs as there are no additional payments except for the primarily agreed one. Lastly, let’s not forget that smart contracts elevate the speed of the overall processes and execution of operations.

Smart Contracts are not legally binding only in cases when they correspond to the specific law; in fact, they are just agreed transactions in a network. So if they are just agreed on transactions, then what is the difference between Smart Contract and Blockchain?


What is the difference between Smart Contract and Blockchain?

First of all,  one thing needs to be established; smart contracts work within blockchain technology. Blockchain in itself is a database of information shared across multiple chains and computer networks. The shared data and information are linked to each other by the supply chain. Blockchains are mainly used for developing and executing cryptocurrencies to transfer funds via digital tokens such as Ethereum, Cardano, Solana.

Let’s not forget that blockchain technologies are also decentralized, which makes the execution of transactions comparable faster, yet transferring funds with digital tokens is not entirely useful in the sense of security. Here is where smart contracts are needed.

Smart Contracts add a ledger of information to the blockchain, making it a bit complex than just payment and holding parties responsible according to the rules of the agreement.

Now we can move further and get a more clear understanding of what smart contracts do on blockchain and how they work.


How do smart contracts on blockchain work?


The ways of use of smart contracts in blockchain can be various. They can be utilized just like a vending machine as done in the Ethereum platform or digital ” if-then” statements written in a programming language.

We know that vending machine hands out items as the vendor does only; there is no actual person who takes the money and gives the product. So, smart contracts can operate as vending machines only in much more wide-range and complex ways.

Smart contracts generally work as digital “if-then.” Let’s imagine you have agreed with your hairdresser or barber to cut have your hair cut. Now the money is going to be given to your hair master only after cutting your hair specifically in the way that you wanted. If there is a slight difference from the hairstyle you have primarily agreed upon, the payment may not take place, or the money should immediately be returned to you.

The example mentioned above is just a presentation of the small scope of how smart contracts can be used. They could easily replace legal contracts in cases where they correspond to the law and prevent taking things to court.

In order for Smart Contracts to start fully operating to crucial steps need to be taken. Firstly, two or more parties need to discuss and agree on the terms depending on which the contract will be considered complete. Afterward, the conditions are encrypted to the smart contract code that will carry the decisions to the blockchain network.

When the contract reaches the status of “Complete,” the transaction gets inscribed in the blockchain just like any other one. What is left is for the other nodes within the chain to update the new status of the network.

The origin of the security comes from the smart contract code that it is based on. Technically what happens is that rules and regulations are written into the network’s code, and no one can change them from the initial state. Those rules are structured in a way that keeps potential scammers and any other outside intervention away from the contract. You can consider a smart contract execution successful if all the sides have come to an agreement and put down their digital signatures.


What are examples of smart contracts?

As already mentioned above, the ways of using smart contracts are various. They can help eliminate weak spots and revolutionize major areas in nowadays life. Here we have showcased just a few examples of use cases.



Smart Contracts can change the game in the financial industry by reducing the errors and workflows that in turn can end up being quite expensive and costly. Workflows could surely be automated by the usage of smart contracts; not only that, but it can also simplify the calculations. Subsequently, smart contracts will help reduce the working hours in trade finance.

Smart Contracts can serve as a helpful tool for managing loans and mortgages. By implementing smart contracts, it will be possible to conduct the processes without the transaction costs simply connecting the parties. A smart contract programmed to track a mortgage can release the property once all the payments are done, and the loan is covered.



Smart contracts are arguably one of the best, if not the best, ways to strengthen patient data security. The patient data will be securely stored in a blockchain which is an actual smart contract usage representation; additionally, the private keys would be the only way to access the patient’s data. In this way, hackers will have close to zero chance of breaking into the healthcare sector’s information storage.



With the use of smart contracts in the insurance sector, the prevention of disputes will be much easier than it is now. In the example of auto insurance, the need for smart contracts is more visible.  Smart Contracts set up right can connect with a certain policy and check the recovered legal documentation, making the process faster than it is usually. Afterward, if no errors are detected and an accident happens, the smart contract will execute itself right after that.


Supply Chain

Supply Chain is by far one of the greatest examples of smart contract use.  Mainly smart contracts will be good for improving inventory tracking. By using smart contracts, businesses can track their items within the supply chain with clear visibility.


Why does a blockchain need a smart contract?

The only thing that seems to be left for a discussion is why exactly blockchain needs a smart contract.  To have a clear understanding, we can take a look at a specific example, so let’s take the example of Ethereum and other decentralized tokens utilizing smart contracts. Before doing so, it is worth mentioning that the world’s most well-known blockchain bitcoin does not utilize smart contracts.

So what about Ethereum? Well, the Ethereum Virtual Machine was built with the idea of smart contracts in the core. It puts to use  Solidity programming language, which allows anyone to develop and launch a smart contract with predetermined rules by which the contract operates and is executed. Ethereum opened a passage for a number of other digital tokens to appear, which in turn continued the wide usage of smart contracts. Like Cardano, which is currently stepping in the feet of Ethereum as recently its rise in the price was higher than that of the Etherum and is generally considered the go-to place for the smart contract execution. In both examples, the job of smart contracts in the system of blockchain is pretty much the same through the ledger; it enables automated agreement without the need for intermediates, thus simplifying businesses and transactions.



As it can be seen currently, Smart Contracts are not only a need but a must in any blockchain-based technology system. It opens up a door to constant improvements and opportunities in Defi technologies such as Smart Contract Audit aimed to ensure the flawless work of any Smart Contact. Yet Smart Contracts are also here to revolutionize our daily lives as well, and visible changes are happening already.