Many people who are new to the world of decentralized networks may ask, “What are smart contracts?” A smart contract is an automated business application that is self-executing and operates on a decentralized network. Blockchain is the decentralized network that serves as a database to provide confirmation of transactions while smart contracts execute programmed conditions on the blockchain. 

Smart contracts are just like ordinary contracts that enable users to exchange money, shares, property, or anything of value in a transparent and secure manner. The only difference between the two is that there is no middle man involved.

They are also commonly known as self-executing contracts, blockchain contracts, or digital contracts.

Smart Contract Definition

To go into more detail, a smart contract is a protocol or code that stores instructions for negotiating the terms of an agreement, verifies the fulfillment automatically, and then executes the terms that were agreed upon. 

The central concept behind it is that it diminishes the reliance on a third party when establishing business relations. This enables independent parties to make an agreement and allows them to transact directly with one another.

Are Self-Executing Contracts Secure

Smart contracts are developed and implemented within decentralized networks like blockchains. In light of this, they have some of blockchain’s characteristics deeply embedded. These include the fact that they can never be altered, and no individual has the ability to break or tamper with them. 

Moreover, these self-executing contracts are distributed. This means that the outcome of the contract is validated by all parties in the network, just like all other transactions on a blockchain. 

This distribution ability makes it impossible for hackers to gain access and forcibly release your funds as all parties in the network would be able to detect fraudulent attempts and mark them as invalid.

How Do They Work

What Are Smart Contracts

Essentially, these contracts work by both ends of the user agreement fulfilling their part. To illustrate this, say you need a rental agreement drawn up. You would pay the lawyer and then wait a specific amount of time before receiving your document.

In a smart contract, you pay with your cryptocurrency and then instantly get access to the document. Both parties have to enact their part, triggering the automatic execution of code that fulfills the terms and conditions around the contract.


A smart contract has the ability to operate independently or together with other self-executing contracts. A user may set a group of them together, and these will depend on each other to complete a specific task.

Integral Parts Of The Contract

There are three objects or integral parts to a smart contract. 

The first is the digital signatures of the parties involved, irrespective of whether the contract will be concluded or not. 

The second is the agreement. All parties to the agreement must have access to it, including the deal and all information pertaining to it. There should be no hidden information or clauses on the contract. 

The third is that the contract must include some mathematically described terms and conditions. This can be facilitated through a suitable coding language. Once those are in place, all parties have to comply with the rules and regulations of the smart contract.

Bitcoin and Ethereum In Blockchain Networks

Since we have established the relationship between smart contracts and blockchain technology, we touch on two of the most notable frameworks to power them.


It is possible to use Bitcoin’s blockchain to power smart contracts through an open-source platform known as RSK. RSK connects to bitcoin’s blockchain as a sidechain, which runs parallel to the main technology.  


Ethereum is the main blockchain framework used to support smart contracts. It is a decentralized platform that is programmed using Solidity. 

The technology operates smart contracts efficiently by minimizing downtime, fraud, censorship, and third-party interference. 

Possible Applications

What Are Self Executing Contracts Used For

There are many ways in which you can use smart contracts in the real world. Since the contract itself uses traditional systems of agreements and records, it can support the following processes:

  • Storing of records
  • Trading activities
  • Supply chain management
  • Mortgage system
  • Real estate market
  • Employment arrangements
  • Protecting copyrights
  • Insurance claims
  • Government voting services
  • Healthcare services
  • Internet of Things network

Advantages Of This Self-Executing Technology

Smart contracts have detailed coded algorithms and feature blockchain properties such as transparency, decentralization, and fraud resistance. In light of this, they are a reliable alternative for establishing business relations and conducting business transactions.

Dealing Directly With Customers

Smart contracts diminish the need to work with third parties and/or intermediaries. This enables you to forge direct relationships with your clients.

Complete Transparency

Smart contracts are completely transparent to all parties involved in the agreement. The terms and conditions of the contract are readily available to any of the parties at any given time.

If either of the parties wants to amend the contract in any way, it has to be decided before everything is finalized. Once finalized, it cannot be changed.

Resistance To Failure

As there is no reliance on any third party or intermediary, no individual has full control of funds or information. Due to the nature of decentralization, if any individual leaves the blockchain network, it will continue to operate efficiently without losing any data or integrity.

Clear Communication

Since the smart contract is entirely automatic and includes all the requisite information with specific details, there is no opportunity for miscommunication to arise. All communication transmitted among the network will be incredibly accurate and crystal clear. No communication gaps will exist under these circumstances. 

Trustworthy Platform

Businesses can conclude agreements that are automatically executed and implemented. These agreements are also immutable and consequently unbreakable.

Reduction In Fraudulent Activity

As smart contracts are kept in a distributed blockchain network, the outcome of any transaction is validated by all within that network. This is significant as no individual can take control and force the release of money or information of another person. Other participants within the blockchain will identify this and invalidate such an attempt.

Smart Contract Security

Cost-Effective Platform

The fact that intermediaries and third parties are eliminated means that the costs associated with those parties also falls away. By removing these intermediaries, there are no additional fees incurred. This allows businesses and their clients to interact and transact directly and also to conduct business with little to no fees for transactions, saving them money.

Record Keeping

All smart contract transactions on the blockchain are stored in chronological order, and each of these transactions can be easily accessed with a complete audit trail.

Free Of Interruptions

When transacting with smart contracts, you can be assured that there will be no interruptions from third parties that may affect your decisions or agreement. You will be solely responsible for the choices that you make and will empower you to conclude deals on your own.

Furthermore, you do not have to wait for confirmation or verification from any third party, making the entire process free from manipulation.


With the increase in hacking in cyberspace, people have become incredibly cautious with keeping their information and documents safe from piracy. By using smart contracts, you will have access to a completely safe website to store your information and documents away from cybercriminals. 

These websites are encrypted with the most stringent level of coding that is almost impossible to hack into. You can rest assured that you have a secure place to keep your sensitive data.

Efficient Performance

Smart contracts will facilitate a more efficient performance. With a combination of speed, accuracy, and automation, the entire contract process is facilitated efficiently without errors, interruptions, or the intervention of third parties and/or a middle man. The smart contract also has the ability to process large numbers of transactions with greater efficiency in rapid time.

No Paperwork

Processing paperwork and documents manually can be quite time-consuming. With smart contracts, all of this is processed digitally, thus saving you a lot of valuable time. Since all processing is conducted in the virtual world, this eliminates the need for paper. This is also a fantastic thing in terms of the environment. 

Digital processing allows you extra time to conduct business without any restraints as opposed to being held back with monotonous administrative work.

Benefits Of Blockchain

Error-Free Processing

Typically, filling in forms manually is prone to errors, but when transacting with smart contracts, the entire process is automated without the possibility of errors. 

This is also accurate and comprehensive as the smart contract includes an entire record of every single detail of all the terms and conditions of that contract. Essentially, your processing will be done quicker, cheaper, and error-free.

Automatic Backups

When working digitally, there is always the chance that you could lose your documents or information inadvertently. The great thing about smart contracts is that they always come with a backup. All of your papers will have many duplicates on the blockchain, so there is very little chance of you losing it. 

Moreover, they record all important documents permanently and with great detail. This is easily retrievable at any time.

Guaranteed Outcomes

Smart contracts enable users to create any agreement that they wish, working in accordance with some defined rules that make their deals more significant. All parties must adhere to the rules that the contract binds them to.

Disadvantages Of Smart Contracts

Although the disadvantages are far less than their advantages, it is important to know what the drawbacks to using them could be.


Transparency is a fantastic characteristic of smart contracts, but some crucial elements require privacy. While some smart contract examples such as Hyperledger give users the option to create a private agreement, others such as Ethereum don’t offer the same level of privacy to their users.

Coding Errors

If the contract code is not perfect and has bugs in it, this can be a problem. Parties involved in the agreements are therefore very reliant on a programmer to jump in if anything goes wrong. The truth is, the same thing that makes it secure means that it’s not entirely accessible, and this can be limiting in the real world where things do go wrong.

Associated Cons

Unreliable Information

As much as it is accurate that the processing will be error-free, there is a very tiny possibility that wrong information may be stored at the beginning. If that is the case, the entire process will be regarded as an error due to the inclusion of false information.

Rogue Contracts

The beauty of smart contracts is that it is self-executing. This can be particularly helpful in most instances. If a hacker, however, manages by some small chance to infiltrate, any illegal activity that they initiate will also be self-executing.

Vague Rules Around Government Regulation and Taxation

Because the technology and concept of self-executing concepts is new, there is a lot of uncertainty around government regulations, taxation, etc.

Questionable Legal Regulation

The contract executes every time the requirements are met. But what happens, if say, you pay your rent deposit fulfilling your side of the agreement. This triggers the owner to release the access key at the same time. However, before you move in, an incident in the apartment block means that you can’t move in on the set date. 

The contract would normally be reversible in court, which isn’t the case here. The contract has already seen through its deliverables.

The Bottom Line

While the world has become comfortable with the traditional methods of entering into an agreement, smart contracts provide a forward-looking approach to the way that we execute business agreements. 

The distinctive features of these contracts make them a lucrative and appealing prospect. Things such as immutability and a distributed network system have undoubtedly shifted our perspective when it comes to business transactions and how we conduct ourselves financially.

With technology advancing at an incredible rate, smart Contracts have the ability to bring revolutionary changes to the manner that we conduct our business. Although there may be flaws and some risks, it’s a bright and positive path to a new era.