What are Smart Contracts in Blockchain Technology: A Simple Explanation for Beginners

Cryptocurrency has become somewhat popularity in this digital era and This has been attributed by development of program such as blockchain, bitcoin and ethuram.

Blockchain specifically has changed how we do transactions. Smart contracts are a key part of this change as they are powerful tools at the centre of this new way of transacting.

This article talks about smart contracts, breaking down the concept for beginners and exploring their transformative potential. So stay on-board and continue reading to discover more about this fascinating technology.

Understanding the Basics: What is Blockchain?

Before we dive into smart contracts, it’s crucial to grasp the fundamentals of blockchain technology.

At its core, a blockchain is a decentralized, distributed ledger that records transactions across a network of computers.

This technology ensures transparency, security, and immutability, making it an ideal candidate for various applications beyond cryptocurrencies.

To understand more about blockchain, check this guide. What is Blockchain Technology and how does it work?

What Is Smart Contract?

Generally, Contracts are agreements between people or parties.

They outline what each party agrees to do and often include conditions or terms that need to be met. Contracts can be written or verbal and are legally binding, meaning that failing to fulfill the agreed-upon terms can lead to consequences.

As an introduction to Blockchain Technology, contracts are just still the same but with some slight difference that it is being executed automatically by machines. So what exactly are smart contracts in blockchain technology.

Smart contracts in blockchain technology a self-executing contract with the terms of the agreement directly written into code. These contracts run on blockchain networks, ensuring transparency, security, and autonomy.

 Unlike traditional contracts that rely on intermediaries like banks or legal systems, smart contracts automate and enforce the terms without the need for third-party involvement.

Because they run on blockchain networks, they are automatically executed when predefined conditions are met. These contracts operate without the need for intermediaries, ensuring trust, security, and efficiency in various transactions and agreements.

Conditions for execution of smart contracts.

For smart contracts to be executed, certain conditions specified in the contract’s code need to be met. These conditions could include things like a specific date or time, reaching a certain value in a transaction, or any other criteria outlined in the smart contract’s programming.

Once these conditions are satisfied, the smart contract automatically carries out the agreed-upon actions without requiring human intervention.

Brief History of smart contracts

Smart contracts, a term coined by computer scientist and cryptographer Nick Szabo in the 1990s, represent self-executing contracts with the terms of the agreement directly written into code. These contracts run on blockchain networks, eliminating the need for intermediaries and automating the execution of contractual clauses.

How Do Smart Contracts Work?

Smart contracts operate on the if-then premise. Meaning, once predefined conditions mentioned above are met, the contract executes automatically.

Take an example of a vending machine – you deposit coins (the condition), and in return, the machine dispenses your chosen item (the execution). Similarly, smart contracts facilitate trust less transactions, ensuring parties involved adhere to the agreed terms without relying on a central authority.

The analogy provided by Vending machines is for example, If someone inserts $2 and presses B4, then the machine dispenses the cookies in the B4 slot. In other words, if the vending machine receives the required item of value, then it performs the requested action.

Smart contracts technically can run on almost any digital platform, but they typically run on blockchain,

Process by process on how Smart contracts work.

1st :Code as the Law

Smart contracts encode the rules and conditions of an agreement in code. This code is deployed on a blockchain, making it immutable and tamper-proof.

2nd :Decentralized Execution

Once deployed, the smart contract operates on a decentralized network of computers, commonly known as nodes. These nodes validate and execute the code simultaneously, ensuring consensus and trust in the contract’s execution.

3rd : Triggering Events

Smart contracts are triggered by predefined events. These events could be a specific date, the fulfilment of certain conditions, or even external data inputs (such as stock prices or weather conditions).

4th :Automatic Execution

Upon the occurrence of the trigger event, the smart contract automatically executes the agreed-upon actions. This could involve transferring funds, updating records, or triggering other smart contracts in a cascading fashion.

Now let’s see the working of smart contracts step by step.

Step 1: Business teams collaborate with developers to define their criteria for the smart contract’s desired behaviour 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


Read Also: Foundations of Cryptography in Blockchain: Types,  Applications & Everything You Need to Know

Key Features of Smart Contracts

Autonomy: Smart contracts function autonomously, devoid of any human intervention once deployed on the blockchain.

Security: The decentralized nature of blockchain provides robust security, reducing the risk of fraud or manipulation.

Trust: Transparent code and blockchain’s immutability foster trust among parties, eliminating the need for intermediaries.

Efficiency: Automation streamlines processes, reducing the time and resources required for contract execution.

Popular Smart Contract Platforms

  • Ethereum: Often hailed as the pioneer of smart contracts, Ethereum allows developers to create decentralized applications (DApps) and deploy smart contracts.
  • Binance Smart Chain: Built on Binance Chain, this platform supports smart contracts, offering an alternative to Ethereum with lower transaction fees.
  • Cardano: Leveraging a proof-of-stake consensus algorithm, Cardano provides a secure environment for smart contracts.

Real-World Applications of Smart contracts in blockchain

Smart contracts have found applications across various industries:

Finance: Smart contracts have found extensive use in financial applications, such as automated payments, decentralized finance (DeFi), and tokenized assets.

Supply Chain: They can streamline and automate supply chain processes, enhancing transparency and traceability from production to delivery.

Real Estate: Smart contracts simplify real estate transactions by automating tasks like property transfers, escrow, and ensuring compliance with contractual terms.

Legal Industry: Smart contracts have the potential to revolutionize legal agreements by automating contract execution and reducing the need for intermediaries.

Let’s see some examples of these applications of smart contracts in blockchain in a broader manner;

1. Smart Contacts and Flight Insurance example.

In a real-life scenario, let’s take Rachel at the airport facing a delayed flight, covered by AXA’s flight delay insurance using Ethereum smart contracts. The smart contract is linked to a flight status database and is created with specific terms. In this case, the condition is a delay of two hours or more.

The smart contract, governed by code, holds AXA’s funds until the condition is met. It is then sent to nodes on the EMV network for evaluation. All nodes must agree on the result, which is recorded on the distributed ledger. If the flight delay surpasses two hours, the smart contract automatically executes, ensuring Rachel receives compensation.

The immutability of smart contracts means the agreement cannot be altered, providing a transparent and automated process for insurance compensation in the event of a flight delay.

2. Voting and Blockchain Implementation of Smart Contracts example

Utilizing Blockchain for voting addresses common issues in centralized systems, such as identity fraud and miscounts. Smart contracts in this context ensure secure, predefined terms, preventing votes from digital identities other than the voters’ own. The process is tamper-proof, with every vote recorded on a blockchain, eliminating third-party interference or manual counting.

In this setup, each voter has a unique ID, and validation occurs within the blockchain network, making the process transparent. The voting system can be on a public blockchain or in a decentralized autonomous organization, ensuring that every vote is unalterably recorded on the ledger, accessible for public audit.

Smart contracts also enable flexible voting systems, allowing the addition or removal of members, rule changes, and adjustments to debating periods. This approach is particularly useful in decentralized autonomous organizations, where decisions are made through a voting mechanism within the organization rather than by a central authority, promoting transparency and accountability.

3. Blockchain Implementation of a Smart Contract and Crowdfunding example

Ethereum’s smart contracts let you make digital tokens for transactions. You can create and issue your own digital currency with a standard system creating a tradable computerized token. The tokens use a standard coin API. Using Ethereum’s ERC 2.0, your created token can be easily traded and accessed from any wallet automatically. As a result, you build a tradable token with a fixed supply. This makes a kind of digital central bank.

For example, if you’re starting a business and need funding, 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 a contributor’s funds until a given date passes or a goal is met.

 Ethereum’s smart contracts can hold funds securely until a specific date or goal is reached. After that, the funds are either given to the business or returned to the contributors. This decentralized method, using a DAO ( Decentralized Autonomous Organization) for crowdfunding, solves problems with traditional crowdfunding systems by giving participants tokens and recording every contribution on the Blockchain.

The terms and conditions are set in the contract, and every individual participating in crowdfunding is given a token. Every contribution is recorded on the Blockchain.

Benefits of Smart Contracts

  • Trust and Transparency: Blockchain’s decentralized nature ensures that all parties involved in a smart contract have access to the same information, fostering trust and transparency.
  • Efficiency and Automation: Smart contracts automate the execution of agreements, reducing the need for manual intervention. This not only speeds up processes but also minimizes the chances of errors.
  • Cost Savings: By eliminating intermediaries and streamlining processes, smart contracts can significantly reduce transaction costs associated with traditional contracts.
  • Security: Blockchain’s cryptographic principles make smart contracts highly secure. Once deployed, the code is nearly impervious to hacking or unauthorized alterations.

Disadvantages of smart contracts

While smart contracts offer immense potential, challenges such as code vulnerabilities, scalability issues, and legal recognition must be addressed. As the technology evolves, so too will the solutions to these challenges.

Let’s unlock these drawbacks in details:

Some disadvantages of smart contracts include:

1. Code Vulnerabilities:  Smart contracts are written in code, and any bugs or vulnerabilities in the code can lead to serious issues, including security breaches and financial losses.

2. Immutability: Once deployed on a blockchain, smart contracts are typically immutable, meaning they cannot be easily changed. If there’s a mistake or need for an update, it can be challenging to rectify without creating a new contract.

3. Complexity: Developing smart contracts can be complex, requiring expertise in both programming and blockchain technology. Small mistakes in the code can have significant consequences.

4. Oracles Dependence: Smart contracts may rely on external data sources called oracles. Depending on external information introduces a potential point of failure or manipulation.

5. Scalability Issues: Blockchain networks may face scalability challenges, impacting the speed and cost-effectiveness of executing smart contracts, especially during periods of high demand.

6. Legal Recognition: The legal status of smart contracts varies globally. In some jurisdictions, they may not have the same legal recognition as traditional contracts, which could pose challenges in certain legal contexts.

7. Lack of Privacy: Depending on the blockchain used, the details of smart contracts may be visible to anyone on the network, compromising privacy and confidentiality.

8. Costs: Executing smart contracts on some blockchains may involve transaction fees, and these costs can fluctuate based on network conditions. This unpredictability can impact the overall cost-effectiveness of using smart contracts.

It’s essential to carefully consider these factors when implementing smart contracts and to stay informed about advancements in blockchain technology that may address some of these challenges.


The Future of Smart Contracts Smart contracts represent a ground breaking innovation, reshaping traditional notions of contracts and transactions. As blockchain technology continues to mature, the seamless execution, transparency, and efficiency offered by smart contracts will likely become integral components of various industries. Embracing this paradigm shift ensures a future where trust, security, and automation redefine the way we engage in agreements and transactions.

NEXT READING: What Is Consensus In Blockchain?: Understanding Differences between Proof-of-Work vs. Proof-of-Stake

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