When hearing the word smart contract, you may think that it is related to the Blockchain but in reality the smart contract has already been mentioned by Nick Szabo since 1990s. Let us dig deeper about the topic.

Smart contracts are programmed digital contacts that are automatically executed when predetermined terms and conditions are met.


What-is-a-smart-contract-and-how-does-it-work--300x300 What is a Smart Contract? and How Does it Work?

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In other words, smart contracts can be viewed as a vending machine, where it is providing its services without supervision from an employee. A vending machine will provide the buyer value when they insert in money. So is the smart contracts (money or a met condition).

If its still confusing let us continue to make the concept more clear…


How does Blockchain Smart Contracts Work

Smart contract is simply a programmed script that is uploaded in the blockchain with its own  functionalities. Here are some of its  traits.


  1. Compatible with Multiple Programming Languages

The smart contracts are written in variety of programming like Solidity, Javascript, and Vyper. I don’t want us to get technical here, but if you like here is a link discussing the details of the programming languages.  

Takeaway from this point is that smart contracts can be prepared by programmers. Its compatibility with multiple language makes it accessible by a lot of potential users.


  1. Immutable on the Blockchain

Smart contract on the Blockchain are immutable and they are hosted on multiple computers (servers) around the world.  For example, if a transaction takes place it is recorded on all the computers which help reducing the potential of a hacker to hack it and any change in information.


  1. Has a Token Wallet Address

It also has its own address and by address I mean it is compatible to store, transfer any related digital tokens for different parties.

Such tokens held in the back of the contract are not controlled by anyone but the code itself so whatever initial code was deployed is going to determine how does this contact works.

So let us say a school decides to reward students with tokens that give them in-school discounts. The  smart contract would have the addresses of the students in a class. In the code it will reward tokens to students who check-in class first everyday rewarding most disciplined students.   The smart contract will be capable of doing that.


  1. Executes on its Programmed Script

I have to emphasise this point again, smart contracts will always execute what is already programmed. For example,  a program can be developed that if a user pays X amount of money then it will provide X amount of tokens ( which are cryptocurrencies or NFTs) from the wallet.

Before deploying the contract to the blockchain, the programmers will be able to give direction to the smart contract by defining the parties, setting parameters, and defining the rules and conditions it follows.


  1. No third-party Involvement is Required

The benefits of having such contact is that it helps in having a self-executing platform.  It will allow less or no required  third-party involvement to manage and work in it.

Possible uses of Smart Contracts

To illustrate the potential of the smart contracts let’s see the possible uses based on certain industries


Financial Industry

Financial institutions could benefit from smart contracts in services  like lending borrowing trading and also it will help the insurance industry to make policies.

Financial Services: For example, if a customer want to have leverage, they could use their own cryptocurrency as a collateral in an exchange for an agreed amount and interest rate that the smart contract identify through its parameters.

If the user pays back the smart contract owners will passively make income. If a user fails to pay then the event or in that case the smart contract will be able to take over the collateral.

Insurance: Users could also buy insurance policies that can be triggered with connection to external data (like a weather data source identifies natural disastrous)  if the smart contract identifies the user requires reimbursement it will transfer the tokens to his/her wallet.


Legal Industry

Smart contracts also can help support interaction and agreements between users due to its automated features.

But as far as I know, smart contracts are not legally enforced yet (This information may change and not necessary accurate)


Building Businesses (or as they call it Decentralised Autonomous Organisations “DAOs”)

With such powerful tool businesses can be built around smart contracts. For example, a founder could be able to make a DAO that raise funding and then invested on behalf of the investors.

Such structure usually has a voting mechanism, whether it is through identifying who is holding tokens or through authorised voters to take decisions on which investment to take.

The above is just one example of a business structure around a smart contract, but there are much more possibilities.



Even gaming can benefit from the smart contracts because items in the games could be part of a a smart contract that reward their player base assets  to use and also possibly be able to use it on any other game that allows it (through Web 3.0).


Anything programmable you can think of…

This technology has huge potential and brainstorming ideas is endless. Who knows what programmers come up with.

Maybe one day they connect the smart contract to hardware products. For example,  by wearing a ring that is connected to a smart contract it will report your  blood sugar and alert your doctor if needed.

It’s could be an artificial intelligent contract that has a  it could learn by itself through experience. This will generate a realistic NPCs in video games that know what each players like and what they need in the Metaverse.


Final Thought

Smart contracts have high potential to add value in the way we interact. It is still new, but once it gets adopted and is easily developed by any regular user, it will be very useful for us whether if we want to make contracts with each other, or just play video games.


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