Many people new to the world of decentralised networks may ask, “What are smart contracts?” A smart contract is an automated business application self-executing and operates on a decentralised network. Blockchain is a decentralised network that serves as a database to confirm 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 transparently and securely. The only difference between the two is that there is no intermediary involved.

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

Smart Contract Definition

A smart contract is a protocol or code that stores instructions for negotiating the terms of an agreement, verifies the fulfilment 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. It enables independent parties to agree and transact directly with one another.

Are Self-Executing Contracts Secure

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

Moreover, these self-executing contracts are distributed. It means the contract outcome is validated by all parties in the network, like other transactions. 

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 fulfils the terms and conditions of the contract.


A smart contract can 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. 

The second is the agreement. All parties to the agreement must have access to it, including the deal and all information about it. There should be no hidden information or clauses in 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 must comply with the smart contract’s rules and regulations.


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 decentralised platform that is programmed using Solidity. 

The technology operates smart contracts efficiently by minimising 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, decentralisation, 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 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, it has to be decided before everything is finalised. Once finalised, 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 decentralisation, if any individual leaves the blockchain network, it will continue operating efficiently without losing 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. 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 transactions is validated by everyone in the 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

Intermediaries and third parties are eliminated means that the costs associated with those parties also fall away. By removing these intermediaries, there are no additional fees incurred. It allows businesses and their clients to interact and transact directly and conduct business with little to no transaction fees, 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 your choices, and it 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 increased cyber hacking, people have become incredibly cautious about keeping their information and documents safe from piracy. By using smart contracts, you can access 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 speed, accuracy, and automation, the entire contract process is facilitated efficiently without errors, interruptions, or the intervention of third parties or a middleman. The smart contract can also process large numbers of transactions more efficiently 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 restraints instead of being held back by monotonous administrative work.

Benefits Of Blockchain

Error-Free Processing

Typically, manually filling in forms 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 detail of that contract’s terms and conditions. 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. Your papers will have many duplicates on the blockchain, so there is very little chance of you losing them. 

Moreover, they record all important documents permanently and with great detail. It’s easily retrievable at any time.

Guaranteed Outcomes

Smart contracts enable users to create an agreement they wish, working per 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 the drawbacks of using them.


Smart contracts’ transparency is a fantastic characteristic, 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 their users the same level of privacy.

Coding Errors

If the contract code is not perfect and has bugs in it, this can be a problem. Parties involved in the agreements rely 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 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 false information.

Rogue Contracts

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

Vague Rules Around Government Regulation and Taxation

Because the technology and the concept of self-executing concepts are 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 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 agreeing, smart contracts provide a forward-looking approach to executing business agreements. 

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

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