What are Smart Contracts?

smart contracts

Most read

Loading Most Ready posts..


When bitcoin was launched in 2009, its goal was simply to be a cryptocurrency that will replace fiat currencies. However, developers soon discovered that blockchain technology has more potential beyond merely creating a digital currency that could rival the physical ones. One of these potentials is the creation of smart contracts, and this was what led to the development of Ethereum.

While many know Ethereum for its cryptocurrency, Ether, which is currently the second most valuable cryptocurrency after Bitcoin, is considered the queen of cryptocurrencies, but Ethereum is much more than its native token, which has risen in value solely because of the widespread use of the platform. The Ethereum platform is an ecosystem that allows developers to create blockchain applications, better known as decentralized applications, which run on the blockchain the same way an android app operates only on an android device.

It is easy to ask what makes Ethereum popular; the answers lie in smart contracts. In this piece, we examine what smart contracts are and all you need to know about them.

What is a smart contract

A smart contract in simple English is an automation application operating on a decentralized network and capable of self-execution based on conditions that have been predetermined. For those familiar with computer programming, the closest example is when software performs an action based on “If/then” programming.

The Invention of smart contracts

Smart contracts are in no way a new invention; the idea has been in existence since 1994. This was when Nick Szabo, a cryptographer, had the idea of recording contracts in the form of computer codes which allows the contract to execute automatically when the conditions in the code are met. With this, the problem of a trusted third party is fully removed. While Szabo was able to research the idea and even wrote a book on it titled “Smart Contracts: Building Blocks for Digital Free Markets,” the technology needed to actualize the idea was not available.

The technology arrived in 2009 with blockchain technology application for Bitcoin, but it was actually in 2015 that the first smart contacts were introduced through Ethereum. 

The purpose of smart contracts

Smart contracts exist for one simple purpose – facilitate trustless transactions and eliminate the need for a third-party intermediary in a digital agreement. In a world dominated by the internet, digital agreements have become the order of the day, from streaming services subscriptions to online banking. 

A challenge faced in digital contracts is the anonymity of both parties, and even when they are not anonymous, it is practically impossible for either party to compel each other to meet a contractual obligation, especially when it is possible that they are not in the same legal jurisdiction.

To address this challenge and ensure compliance of the parties to the agreement, a bigger corporation serves as the intermediary which will host and execute the contract. Such companies have the power to enforce the contract. While this is great in itself, the challenge is that the intermediary usually has strong influence and control on such digital agreements.

With smart contracts, these centralized corporations serving as the intermediary for the digital agreement will no longer be needed as the contract can execute itself once the stipulated conditions are met. The contract will be hosted on the blockchain, where it is near impossible to tamper with it.

The risks associated with a centralized network, such as employees being compromised, coordinated attacks on the network, communication mixup, and many others, are absent in a decentralized smart contract. 

How smart contract works

Since we already know what smart contracts are, it is easy to see how it functions. To understand this best, we use a scenario of how smart contracts can be applied in real estate.

Imagine A wants to sell his house to B. instead of going through a lawyer or real estate, they could simply create an agreement on Ethereum using a smart contract. Such agreement could simply state that WHEN B makes stipulated payment to A, THEN B receives house ownership. By simply doing this, real estate transaction sales can be executed seamlessly. What makes smart contracts great is the fact that it is totally decentralized as it runs on the blockchain, requiring no input from any of the parties once it has been programmed. Thus, anything from common real estate transactions to goal setting can be done with smart contracts.

SMARTRealty as an application of smart contracts

The real estate industry is a perfect place for the implementation of smart contracts for rental agreements. A great example of this is the SMARTRealty. This platform was launched in 2018 with ICO. It seeks to implement technology for real estate transactions by creating a smart contract template system that can be used by its clients for any specific transaction.

The project is made up of three elements. There is the SMARTRealty contract platform where the contract creators have every tool needed to create a SMARTR contract that matches their needs. The framework here works perfectly for both the buyer and the seller by allowing them to create smartrealty smart contracts suitable for their jurisdictions.

There are also the SMARTRealty listing platforms where property owners can create listings of their property for property sales or rent. Such listings will be distributed across several platforms so that customers can see them easily.

The RLTY tokens are another feature of the platform, and this is used for smart contracts. It is the native token used for processing on the platform. The tokens had an ICO price of 0.0008 Ether with a 40% bonus during the first two weeks of the ICO period. The asset can be acquired using any of the common cryptocurrencies.

Types of smart contracts

Since smart contracts were created, it has continued to evolve and now, we have different types which include;

  • Multi-Signature Smart Contracts

This is the smart contract in its basic form. For multi-sig smart contracts, a stipulated number of persons must sign the transaction with their private key for such a transaction to be valid. This form of smart contract was first used in 2012 with bitcoin.

  • Protocol Smart Contracts

It is a combination of blockchains working together as an application to execute programmatic instructions known as opcodes.

  • Scriptable Smart Contracts

This was the type of smart contract created by Ethereum in 2015. It allows the entire blockchain to serve as a single supercomputer capable of operating several applications at the same time. It allows developers to create, manage and modify their own smart contracts using a very easy-to-use scripting language.

  • Connected Smart Contract

This is like scriptable smart contracts except that it is linked to the off-chain, which comprises real-world data and systems. It is connected through a secure middleware known as an oracle, which allows smart contracts to transmit data and communicate with other systems while also automating smart contract execution based on off-chain events and data.

How smart contracts can be used

The applications of smart contracts are numerous and represent one of the blockchain technology features with the most potential. They include;

  • Games

There are several games hosted on the blockchain networks, and smart contracts play a significant role in several executions within the game. With a smart contract, in-game actions, in-game item generation, and lots more can be done without any risk of fraud, giving users confidence of zero manipulation.

  • Tokens

Whether it is a fungible token, non-fungible token, security token, and lots more, smart contracts can be used in creating token contracts that can manage, assign and track tokens,

Decentralized Finance Products This is one of the fastest-growing areas of blockchain technology, and smart contracts play a major role in creating products and services similar to what exists in the traditional financial market. Whether it is staking, escrow, etc., a smart contract can be used for just about anything.

  • Insurance

Another area of application of smart contracts is in insurance, in particular, parametric insurance. This is a form of insurance where a predefined event determines whether a payout will be paid. Once the event happens, it triggers the execution of the smart contract. 

  • Health System

One of the challenges currently facing the average internet user today is the protection of personal data and information. Whether it when using social media platforms like Twitter and Facebook or seeking service through the internet, privacy is gradually becoming a challenge as every website is trying to get as much information as it can for targeted ads. 

But smart contract technology can put the user in control of their data. A good place to use this is the health system, where users can put their health information in a smart contract and control the access that a health service provider has to such data. EncrypGen is a good example of an app that makes use of smart contracts in this manner.

Smart contracts can also be used for analytics, allowing a team to extract data from the blockchain, visualize and track content, metrics in real-time, and effectively project growth expectations.


Smart contracts are an amazing innovation with lots of applications and potential. In fact, the sky’s the limit for it, and its use is expected to grow with time.

Share link:

Alden Baldwin

Journalist, Writer, Editor, Researcher, and Strategic Media Manager:With over 10 years of experience in the digital, print and public relations industries, he has been working with the mantra, Creativity, Quality and Punctuality. In his waning years promises to build a a self sustaining institute that provides free education. He is working towards funding his own startup.As a technical and language editor, he has worked with multiple top cryptocurrency publications such as DailyCoin, Inside Bitcoins, Urbanlink Magazine, Crypto Unit News and several others.He has edited over 50,000+ articles, journals, scripts, copies, sales campaign headlines, biographies, newsletters, cover letters, product descriptions, landing pages, business plans, SOPs, e-books, and several other kinds of content.

Stay on top of crypto news, get daily updates in your inbox

Related News

Subscribe to CryptoPolitan