What is a Smart Contract?

One of the hot topics which has arised regarding Blockchain and Web3 is the following question: what is a Smart Contract? Smart contracts are digital contracts where the terms of the agreement are written in code within the blockchain (such as Avalanche, Ethereum, or Ripple). This allows the contract to be functioning automatically and in a decentralized network, without needing intervention from a legal authority or interaction between the two parties involved (they can stay anonymous if desired).

This concept has revolutionized the contract definition as we know it since the transactions become trackable making the contract much more traceable, transparent, and irreversible. But to understand this concept better we are going to learn how smart contracts actually work, the benefits of using them, and see some examples.

How do smart contracts work

To learn what is a smart contract and how they work on on blockchain, it is important to understand the technology behind it, which makes a smart contract what it is.

Blockchain consists of a shared database replicated in several places. Each block of content or data is transferred and stored in replicated blockchains. They are validated and linked together with the rest of the chain in a way that can’t be tampered with or erased, making the whole process highly secure. 

Thanks to the blockchain, smart contracts are possible. In this case, it is the statements of the contract (such as if this…then that…) that are written in code on a blockchain so that the conditions on the contract are executed automatically when all the variables needed are met. The outcome is a contractual agreement free of middlemen and highly effective.

The stipulations and conditions to be met have to be defined by the participants of the contract and can be as many as needed. Also, it’s important to establish the terms such as transactions, rules that control them, and how to resolve problems, if they may occur. When all this is done, it’s up to the developer to program the smart contract into the blockchain.

Benefits of smart contracts

Implementing smart contracts in your business can be very positive. Let’s see some of the main benefits of smart contracts in comparison to classic contractual agreements. 

Efficiency and accuracy

Since smart contracts are automated and require a previous and explicit input of all the information and contractual terms, they reduce substantially the possibility of errors and the time spent on paperwork.

Transparency and security

All the information within a smart contract is accessible and fully visible, making this kind of contract much more transparent. Also, theys rely on the highest level of data encryption available (thanks to blockchain technology).

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Economic and autonomic

Smart contracts do not require any participation from third parties nor any human intervention in the processing and overview, which offers autonomy and independence to the parties. This also saves them a big amount of time and money that is usually invested in intermediaries for securing a contract when done without relying on the blockchain.

Speed and automation

Once the transactions and conditions in the smart contract are met, the outcome is executed immediately without needing any paperwork or extra time. Also, it doesn’t need to be overseen or controlled since the code will do the job for you and will let you know when it is all done.

Examples of what a smart contract is

If you think about it, any industry that works with data can be benefited from working with the blockchain algorithm and smart contracts. Let’s see some of the main applications and examples.

Voting systems for the government

The voting systems are mostly inefficient and therefore normally suffer from low participation. Also, there is the fact of possible manipulations which make the process less reliable. One possibility to solve all this could be using smart contracts: no more tedious paperwork or fraud

Healthcare records and data transfer

Creating smart contracts between insurance companies and hospitals, for example, could speed up the research for proof of service. Also, smart contracts could come in handy for managing supplies or supervising online prescriptions.  

Finances and accounting

Just look at cryptocurrency to understand the benefits of smart contracts in finance. They are what make make any transaction in this field safer, quicker, and more transparent.


One way to make the funds of a charity even more transparent to its supporters is by using smart contracts. Transactions this way would be safe and visible, so it eliminates the doubts about where the donations end up.

Supply chains

In this industry, the amount of paperwork can be overwhelming, which makes the process more difficult, slow, and vulnerable. With blockchain smart contracts, all this process could be managed automatically by coding payments, tasks, or inventory control.

Apart from these examples, there are a lot more possibilities when it comes to using smart contracts such as in startups, travel, warehouse, trading, or even education.

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How to create a smart contract

Creating them requires several steps:

Define your contract

Firstly you need to know what you want your smart contract to do. Make sure you consider all the parts involved in it and their goals.

Code it

The next step is to use a programming language to code the smart contract (or hire someone to do it for you). For this, it’s necessary to have an integrated development environment (IDE) -a place to write your contract. One of the most popular IDEs is Remix, an application for creating Ethereum smart contracts, amongst other possibilities. 

Test and compile your smart contract

Testing your smart contract is vital since once you place your contract in the blockchain you won’t be able to edit it. Many IDEs offer testing environments where there’s no need of using actual cryptocurrency to do so. 

Once everything is tested and cleared to go, the next step is compiling by converting the smart contract onto the final type of file (JSON file, normally), suitable for the web.

Deploy it onto the network

Now it’s time to place your contract in the network and execute it. After indicating wallets and rewards, your contract will be launched and ready to kick off when the agreement terms are met.

Shirly Nowak
Shirly Nowak es una experimentada Project Manager y Copywriter, con más de 5 años de trayectoria, en los que ha podido trabajar en proyectos de diferentes sectores.