In addition to cryptocurrencies, another widespread innovation called smart contracts runs in the family of blockchain technology. They make way for less paperwork, more guaranteed and reliable agreements, and trustless transactions between the parties involved. But before discussing how they can do all this, let’s first take a look at what they are. 

What is a smart contract?

American cryptographer Nick Szabo first shared the concept of smart contracts in 1994—fifteen years before Bitcoin’s birth. Fast-forward to today; they have become very popular in the cryptocurrency and blockchain space.

A smart contract is an “application or program that runs on a blockchain” and is designed to perform necessary actions according to the terms of an agreement automatically. It works like a typical agreement or contract used for buying or selling properties or cars, exchanging money, and a lot more—but in digital form.

In the blockchain space, smart contacts are written as codes. These codes, along with the terms and conditions of the contract, are publicly available on the decentralized and distributed ledger that records transactions or blocks.

When the outlined event or expiration date in the smart contract is triggered, the code or agreement will occur. In fact, Ethereum (ETH) is the first blockchain to host and execute smart contracts—which were done within the Ethereum Virtual Machine (EVM). The EVM provides a runtime that will perform the code or agreement written in the contract.

Three essential parts of a smart contract

Like any other contract or agreement, a smart contract comprises three important components—signatories, subject, and terms. Let’s briefly define each.

  1. Signatories – All parties involved in the agreement will have to put their digital signature on the smart contract, as these will imply their agreement or disagreement with the terms and conditions stated in it.
  2. The subject of the agreement – This refers to the object or subject of the contract. This can be a car, real estate property, or medical records, to name a few.
  3. Specific terms – These terms must be specific, clear, and include all the rules, penalties, and rewards associated with the said agreement.

How do smart contracts work?

We mentioned earlier that this technology works like any other agreement but in a digital and more reliable form. Unfortunately, sometimes people get scammed or deceived by their trade or transaction partners—this is one of the many things smart contracts aim to fix. 

Smart contracts facilitate “trustless” agreements, which means the parties involved don’t have to know each other to establish trust and confidence. Each party can make commitments or agreements through blockchain, which will ensure that the contract won’t push through without the fulfillment of the conditions stated.

There won’t be any third parties or intermediaries needed to run and secure the contract, which means that there will be lesser human errors and reduced operational costs. 

What are the benefits of a  smart contract?

Earlier, we discussed how smart contracts facilitate paperless and reliable transactions, so let’s take a look at the perks it can give you.

Efficiency and convenience

Processing documents manually can be tedious and time-consuming. There’s also a possible risk of getting your documents misplaced or stolen if it’s not kept in well-secured storage. With smart contracts, documents and other essential data are recorded digitally, making record tracking easier and more efficient.

Trust and full control of the agreement

Your documents are kept on a secure, shared ledger—not in someone else’s cabinet or vault. Smart contracts don’t need to be run or monitored by intermediaries, which means you have full control of the agreement. The blockchain also ensures that all data provided by both parties is accurate.

Guaranteed outcome

Smart contracts can also work as an escrow service that holds the money and ownership rights in a secure and automated system until the time agreed upon by the parties involved. It can be programmed with the functions of an intermediary, for example, and works on an “if-then” principle.

For example, if a real estate buyer completes payment to the property, then the property owner will release the title and keys to the buyer.

Safety and strong security

With smart contracts, your agreement is encrypted. It uses complex cryptography, so it can’t be easily accessed and is extremely difficult to hack.


Smart contracts don’t need intermediaries—no real estate agents, financial advisors, notaries, or other possible third parties. This means you won’t have to pay so much for these service providers.

Real-world use cases for smart contracts

As technology advances throughout the years, more and more real-use cases for smart contracts have begun to pop up. Here are a couple of cases that you may have already heard of: 

NFTs and NFT gaming

Smart contracts and NFTs go hand-in-hand like vanilla ice cream and apple pie. They compliment each other so well that many of today’s NFTs implement smart contracts into their ecosystem—including gaming, art exhibits, collecting, and more. 

There are two main ways in which smart contracts are integrated into NFTs and vice versa. 

The first is that NFTs can be embedded within smart contracts. This essentially means that a smart contract owns an NFT and can be transferred to another user when the rules and events within the smart contract are fulfilled. 

The second is the other way around: smart contracts embedded within NFTs, giving users access to the assets within the NFT. Let’s say that there’s a song within an NFT and it’s embedded with a smart contract. To access the song, someone would have to pay the amount defined within the smart contract. However, this is a process that will most likely happen in the background when users press play on their apps. 

The partnership between NFTs and smart contracts has led to many successful ventures, including hit blockchain games and NFT marketplaces like OpenSea. 

The legal industry

One of the most interesting use-cases of smart contracts is in the legal industry, providing a potential alternative to lawyers or other third-party intermediaries that mediate business engagements. Smart contracts could mean real development in this space, lowering the costs needed to conduct a transaction. 

In fact, some US states have already begun to allow the use of smart contracts and blockchain technology in the legal industry (in certain aspects). For example, California allows marriage licenses to be issued with blockchain technology and Arizona allows enforceable legal agreements to be created with smart contracts. 

Real estate

Similar to its use case in the legal industry, smart contracts have the potential to play significant roles in real estate. Without the need for an intermediary, it could lower costs by eliminating extra charges like closing fees, broker fees, and title transfers. Also, when fractions of a property are tokenized, all of the record-keeping can take place on the smart contracts, saving time and money for both parties.  

Additionally, it could possibly lower the barrier to entry for investment by advancing fractional ownership of assets. 

Social media

One of the main problems of today’s social media is the issue of privacy. Most platforms are centralized, leaving the control of all your information to a single entity. With social media platforms like Steemit now available, it’s easy to see that there’s a lot of potential for smart contracts in this space as well. 

Steemit is a blockchain-based social media platform that allows users to earn money by voting and creating high-quality content. It uses a currency called Steem, which you can buy and sell on crypto exchanges or earn by creating and voting for content on the platform. 

Steemit uses smart contracts in two main ways:

  • Steem Power – This is the backbone of the entire voting system. The more Steem Power you have, the stronger your vote is. The stronger your vote is, the more influence you have on the platform.
  • Steem Dollars – This is a debt-like instrument that promises you 1 USD worth of Steem at some point in the future. 

Together, all these features work to create an ecosystem that encourages high-quality content. 

Web browsing

Similar to its use case on social media, smart contracts in web browsing offer a richer experience when it comes to supporting the creators we like. 

Web browsers like Brave have already done this by building a browser with a built-in wallet that people can use to tip their favorite content creators. Brave was built to give more power to creators rather than the advertising companies that take a portion of the money. 

In this browser, there are two smart contracts being used:

  • The Policy Smart Contract (PSC) – This is the smart contract that’s responsible for validating payment requests and billing users’ rewards. 
  • The Fund Smart Contract (FSC) – This smart contract receives and escrows funds for campaigns. 

Together, these two smart contracts create an ecosystem that provides a more pleasurable browsing experience for many—all without the need for ad-blockers. 

To put it briefly

Smart contracts work like a digitized agreement—but more accurate and efficient, cheaper, and faster. It is guaranteed by an “if-then” principle that signals when the agreement should proceed or be terminated. 

If a lot of industries and businesses adopt smart contracts in the future, transactions and agreements, as well as data storage and sharing, will be more secure and reliable in the many years to come.

*The content of this article is for informational purposes only. If you rely on the information in this article you are responsible for ensuring by independent verification its accuracy, currency, or completeness.