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A smart contract is a set of rules coded in form of a program and is stored on a blockchain. It is executed when predecided conditions are met and a respective event is triggered. It is essentially a digital version of a traditional physical contract that automatically verifies the completion and enforces the contract’s provisions as the trigger is reached.

Nick Szabo, an American computer scientist who established a virtual currency dubbed “Bit Gold” in 1998, 10 years before the development of bitcoin, introduced smart contracts in 1994. He is also known as the father of smart contracts.

The smart contract was merged with blockchain technology by Vitalik Buterin, the founder of Ethereum, in 2003. Smart contacts became a terrific combo when they were coupled with the Ethereum blockchain. The impact was so great that the significance of blockchain became even more prominent across the globe.

What makes smart contracts so special?

Three things make smart contracts so special.

1. Speed

As our tasks is automated using predecided conditions, saving hours of time on various business processes.

2. Safety

Smart contracts are encrypted, and cryptography keeps all documents safe from intrusion.

3. Accuracy

Using smart contracts eliminates errors any human errors in terms of execution and management.

How does a smart contract work?

The way a smart contract works is quite similar to traditional, paper-based contracts. The only difference is the fact that these smart contracts are self-executing and do not require any human intervention (be it based on a primary or a third party). Though in some cases, some intervention might be needed.

What happens here is, once the smart contract code is ready and tested, it is deployed on a third-party server. Once the designated program is live, the associated parties connect their wallets with the contract address and execute them. This initial execution activates the contract’s initial agreement terms and then the respect checks are kept in the premise.

On completion of all programmable terms, the contract is marked as completed. Though the code lives even after the execution and intermediary transactions can be referred from the respective blockchain easily.

Here, the elimination of the middleman from the contract helps counterparties save a lot of time and money, in coordinating and proceeding with the successive steps of execution. Also, do note that once a smart contract is created, it cannot be altered. As a result, it is impossible to commit fraud, and as it lives on the blockchain, it is even more difficult.

Types of Smart Contract

1. Smart Legal Contract

It is a type of smart contract that is legally binding and requires the parties to perform their duties. Also, a failure to do so may result in legal action against the party that is in breach, which can be triggered immediately by the smart contract.

2. Decentralized Autonomous Organizations

DAO’s can be described as the communities that exist on the blockchain. These communities can be defined by a set of agreed rules that are coded through the smart contract. Each participant and their actions are subject to the rules of the community with the task of enforcing these rules. These rules are made up of multiple smart contracts and work together (in conjunction) to track the activities of the community.

3. Application Logic Contracts

Application logic contracts, or ALCs, are blockchain contracts that contain applications that contain application-based code. They allow communication between different devices, and you can think of them as the combination of the Internet of Things (IoT) and blockchain technology.

Advantages of Smart Contract

The smart contract has numerous significant advantages that have become increasingly important in today’s personal life.

1. Saves Time and Money

The first advantage of a smart contract is that it eliminates the need for a third party, saving both time and money.

2. Speed

It takes a long time to create simple contracts and keep agreement terms in check, but with smart contracts, everything is more efficient. How? As the code lives on the cloud, it can be accessed easily by all involved parties.

3. Security

Smart contracts are stored in blockchain technology, making them difficult to hack and hard to alter. It is encrypted, and here, cryptography prevents unauthorized access to all associated documents.

4. Trust

The translucent, autonomous, and secure nature of the agreement removes any possibility of manipulation, bias, or error.

Disadvantages of Smart Contract

1. Difficult to Change

While smart contract processes are nearly impossible to change, any error in the code can be time-consuming and costly to correct.

2. Possibility to Defect

Even a slight lack of attention can result in vulnerabilities in the application, which eventually, can result in system failures, contract compromise, or both.

Difference Between a Traditional Contract and a Smart Contract



It’s takes 1-3 days to plan and start execution of a physical contract.

It’s take short time and done in minutes.

It is written in a legal language.    It is written in a computer language.

In case of breach of contract, you should go to court.

In case of breach of contract, sanctions come automatically.

Individuals based on local laws.

Automatically executed by a computer program.

It is very important to have a physical presence in it.

All the work is done through virtual presence.

Lawyers must be required

Lawyers may not be necessary


There is no doubt that the implementation and development of smart contracts is the next step in innovation, which can directly save billions in indirect costs to businesses and governments across the globe. And seeing the current trends, smart contract technology is progressing at a good pace and people are beginning to understand their importance in the true sense.

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