Gareth Johnson
Gareth Johnson
Updated on November 20, 2023

In the cryptocurrency realm, a Smart Contract is a small piece of computer code that is automatically executed whenever a framework of criteria specified by the contract’s author is fulfilled. The blockchain network is the underlying technology used to store, protect, and manage smart contracts. These digital agreements are labeled as ‘crypto contracts’, because of the cryptography methods implemented for increased safety of the transaction data. 

It all began in 1994 after the computer scientist and cryptographer Nick Szabo proposed the concept of contract recording that would take the convenient form of a digital code. When specific criteria are fulfilled, this contract was supposed to be automatically executed. 

Behind this concept, there was also a plan to eliminate the requirement of an authorized intermediary service provider, such as a centralized bank or a regulatory body. Indeed, the main advantage of a smart contract is how it enables the implementation of a peer-to-peer contract without the participation of legal experts or trusted third parties. 

Several years back, blockchain technology laid the groundwork for cryptocurrencies as a means to revolutionize and decentralize global banking. With the development of Smart Contracts as part of the Ethereum platform, money can move from one entity to another based on the conditions of a smart contract being met, without any human interaction. But, before delving deeper into the concept of smart contracts, let’s first see how these agreements are made.

How Are Smart Contracts Created?

Smart contracts may be created on a variety of blockchain platforms, especially on Ethereum as the most popular choice. A legally enforceable Smart Contract must satisfy all three of the conventional contract’s criteria explained below. 

Lines forming a handshake with open laptop on background on table

To begin with, a party in the contract first must make the offer. Next, the client must accept the conditions being proposed in the contract. Lastly, the participating parties in the Smart Contract reach an agreement on mutual commitments and responsibilities. As with the conventional contract law, smart contracts should convey a specified value upon which the contracting parties also agree. 

The process of creating a Smart Contact typically involves an EMV protocol that enables the creation of these contracts to utilize programming languages such as Solidity. The EMV protocol commences by implementing the computer program to execute the smart contract on each node (computer) that comprises the Ethereum network. 

How Do Smart Contracts Work?

An encrypted version of a Smart Contract is produced and stored in a block on the Blockchain Network once it has been created, validated, and authenticated. When the code of the Smart Contract is implemented in the program, all nodes of the blockchain network are automatically updated with the encrypted information contained in its block. 

More specifically, each node of this network executes the program in a coordinated way, ensuring that no operation will be disrupted during the process and all ledgers are updated at the same time. Also, the automation of some of its processes eliminated the need for a third-party mediator, as is often required in real-world contracts.

This functionality of the Smart Contracts acts as a buffer to protect the network from exceeding its processing capability. Also, it protects both the contract and the transaction data from possible cyberattacks. As for the expenditures which are limited to the executed instructions, they include network and memory use, as well as the overall amount of the performed programming commands.

The Synthesis of Smart Contracts and Blockchain Technology

Smart Contracts are one of the most extensively used applications of Blockchain’s digital mechanism since they ensure the security of transactions while facilitating lower transaction costs for the companies and traders. The innovative use of the smart contract code has also effectively eliminated the need for the involvement of a mediator in corporate partnerships since Blockchain Technology is extremely safe and accessible due to its decentralized nature.

When it comes to these self-executing contracts based on Blockchain Technology, the network of nodes that process and validate transactions on a given blockchain are able to automatically execute the agreement when specific conditions are met. 

Blockchain technology with binary codes on black background

On the other hand, the blockchain (also labeled as a distributed public ledger) stores the encrypted transaction data, thus making it difficult for these transactions to be manipulated in any way. In this regard, Ethereum (ETH) is widely regarded as the most advanced distributed software framework and operating system that accommodates Smart Contracts.

What is an Ethereum Smart Contract?

Based on the Ethereum blockchain, a smart contract is a collection of programmed operations and encrypted transaction data that is stored at a specific address on the blockchain. Without the intervention of a governing authority, the Ethereum blockchain platform regulates every contact among its users. 

When two or more traders on the network interact among themselves, the Smart Contract pre-defines the contract terms to which both participants must adhere to. When certain criteria and circumstances are met, a transaction or some other pre-programmed process is activated.

The Ethereum blockchain platform was built with the goal of enabling programmers to develop their own decentralized applications (dApps) and create customized smart contracts that suit their needs. Due to the fact that Ethereum enables developers to design their own autonomous Smart Contracts, programmers have full control to create and deploy them for any purpose. The Ethereum platform is considered to be the most convenient for creating Smart Contracts because it was – in fact – developed with this particular purpose in mind. 

Finally, the most notable distinction between a Bitcoin Smart Contract and an Ethereum Smart Contract would be that the Ethereum smart contracts are Turing Complete. This implies that almost anything can be computed provided there is sufficient processing power as well as time for it.

What is a Bitcoin Smart Contract?

A Bitcoin Smart Contract is a piece of software code that is recorded on the Bitcoin blockchain and then processed by all devices in the system. When uploaded, the code of the Smart Contract remains indefinitely on the blockchain. Additionally, the developer defines the guidelines and the provisions of this digital agreement upon the consent of all users that utilize it.

Woman holding pen signing on tablet

In contrast to the flexibility for developers to code and execute Smart Contracts that the Ethereum blockchain network provides, the Bitcoin blockchain network is characterized by an absence of the Turing Complete System used for reading complex databases. Without this digital language coding algorithm, Bitcoin Smart Contracts have a limited programming potential.

Nonetheless, the Bitcoin distributed ledger safely stores the transactional records and executes the agreement, the same as the Ethereum platform. Based on a study conducted by the University of Applied Sciences Ruhr West in Germany, only 6.9% of all of the smart contracts that they analyzed made use of control flow mechanisms that require a Turing complete programming language. This means that Bitcoin Smart Contracts would have been equally as useful as approximately 93% of the smart contracts that were sampled from the Ethereum network.  

Smart Contract Use Cases

While many individuals continue to be suspicious of cryptocurrencies, the use of blockchain technology in certain companies has gained significant recognition and acceptance in recent years.

Smart contracts offer a plethora of potential uses since they are being used by a growing range of enterprises to conclude transactions and deals. There are a growing number of companies and even Decentralized Autonomous Organizations (DAO) like Uniswap that currently utilize smart contracts for their day-to-day activity.


Banks, for one, use Smart Contracts to facilitate anything from fundamental transactions and financial derivatives, to much more intricate monetary operations such as real-time auditing. To continue with, Smart contracts contribute to the modernization of traditional banking by incorporating important bookkeeping tools and removing the likelihood of tampering with the general ledger. Additionally, they facilitate open participation of the investors in the decision-making process.

Supply Chains

A supply chain refers to a collection of relationships between a business and its suppliers for the purpose of creating and delivering a commodity to the ultimate consumer target group. 

Historically, supply chains have been hindered by systems based on large volumes of paper documents that have to pass several authorization routes. This lengthy procedure raises the likelihood of scams and monetary damage. By providing a transparent and reliable digital format of the documents to all partners involved in the supply chain, Blockchain Smart Contracts can easily and efficiently eliminate these concerns at an even lesser cost of the process. 

Government Voting System

Smart Contracts that run on a blockchain have the potential to completely decentralize and secure the voting procedures for governments against any manipulation with the votes. 

Violet voting sign on brown blocks on wall

Decentralized Autonomous Organizations (The DAO)

The DAO that we mentioned before, Uniswap, also benefit from the use of Smart Contracts based on the blockchain network by securely automating the process of exchanging one cryptocurrency for another in their decentralized exchange systems. 

Healthcare and Insurance Companies

Smart Contract platforms are utilized to both simplify and speed up the transactions in a variety of contexts, including healthcare costs transacted by the insurance companies and the health systems. 

With the use of a private key, blockchain technology may be used to store patients’ encrypted health histories. Due to privacy issues, only selected persons would be allowed access to this data. In a similar vein, medical studies may be performed in a safe and secret manner with the utilization of Smart Contracts.

On the Future of Smart Contracts

According to Vitalik Buterin, the creator of Ethereum, the future of Blockchain Technology and networks lies in Smart Contracts. As more businesses develop blockchain ecosystems, Smart Contracts establish themselves as a critical facilitator or enabler of those systems. 

Smart contracts make use of computer code to automatically execute a consented set of obligations between two or more users of the blockchain platform. As a reminder, this eliminates the necessity for a middleman throughout the execution of the terms of the agreement. In turn, this allows for a more swift and cost-effective transaction than the traditional contract law or financial services could facilitate.

Consequently, the inclusion of smart contracts creates an infinite number of opportunities for fully decentralized peer-to-peer contractual obligations that utilize the technology underlying Bitcoin, Ethereum, and other digital currencies in order to accomplish far more than merely transferring and storing funds.

A Few Words Before You Go…

Smart contracts rely on the Blockchain Technology to eliminate the need to have a trusted third party to mediate your contract. These self-executing contracts based on the Blockchain Technology are also a highly practical digital alternative to paper contracts since they remove all counterparty risk that is typically found in real world contracts. 

People typically pay for the services of a notary public or a lawyer to have their documents processed. With Smart Contracts, they can create, enforce, and complete a deal or agreement by themselves. In this regard, the greatest analogy for Smart Contracts is that of a vending machine. Normally, you would see a lawyer or notary, reimburse them for the service, and allow time for the paperwork to be prepared. 

With the use of smart contracts, however, all you have to do is put the money into the vending machine (which is the address for the smart contract) to complete the transaction and for the resulting asset to be sent to your digital wallet. To sum up, Smart Contracts allow people to execute deals without any third party which adds both to the swiftness and reliability of the transactions. 

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