What is Smart Contract in Blockchain and how it works?

One of the most unique features of blockchain is its quality of acting as a decentralized which is shared between all the parties of the network thus, eliminating the involvement of middlemen or third-party intermediaries. This feature is particularly useful because it saves you from the chances of any process conflict and saves time too. Though Blockchains have their own set of issues that are yet to be resolved, they offer faster, cheaper and more efficient options as compared to the traditional systems. Due to this, even the banks and governmental organizations are turning to blockchains these days.

Though the idea of smart contracts came into existence long back, the current world that we live in works on paper-based contracts. Even if digital contracts are used, the involvement of a trusted third-party from the system cannot be eliminated. While we have defined a system of functioning with this method; we cannot say for sure if it is always smooth. The involvement of third-party might lead to security issues or fraudulent activities along with an increased transactional fee.

With the introduction of blockchain in the digital technology space, such issues can be addressed efficiently. A blockchain based system allows all the entities in the network to interact with each other in a distributed manner thus, eliminating the requirement of any trusted third-party. In simple terms, Blockchain is a technology that stores data on a distributed ledger. The stored data of records and transactions are available to all the parties in the network in real-time. Blockchain technology gained attention with the introduction of the Bitcoin, the first and most established cryptocurrency so far. Other than the application of cryptocurrency, Blockchain has evolved and its use cases are coming forward in different industries.

Smart contracts are one of the most successful applications of the blockchain technology. Using smart contracts in place of traditional ones can reduce the transaction costs significantly. Ethereum is the most popular blockchain platform for creating smart contracts. It supports a feature called Turing-completeness that allows the creation of more customized smart contracts. Smart contracts can be applied in different industries and fields such as smart homes, e-commerce, real-estate and asset management etc.

What are Smart Contracts?

A smart contract is a set of computer code between two or more parties that run on the top of a blockchain and constitutes of a set of rules which are agreed upon by the involved parties. Upon execution, if these set of pre-defined rules are met, the smart contract executes itself to produce the output. This piece of code allows decentralized automation by facilitating, verifying, and enforcing the conditions of an underlying agreement. Smart contracts allow you to exchange anything of value including money, shares, property etc, in a transparent manner eliminating the need for a middleman and keeping the system conflict-free.

In a normal world process for getting a court-registered document as a proof, you would need to go to a lawyer or notary first, give them money in turn of their services and wait till you get the document that you need. However, the scenario changes completely with smart contracts. When you run this process with smart contracts, you’d simply get the document of your need by paying just for that and this will be done without the involvement of any third-party such as the lawyer in this case. Moreover, smart contracts are not limited to only defining the rules around any agreement but they are also responsible for automatically executing those rules and obligations.

In other words, Smart contracts are automatically executable lines of code that are stored on a blockchain which contain predetermined rules. When these rules are met, these codesexecute on its own and provides the output. In the simplest form, smart contracts are programs that run according to the format that they’ve been set up by their creator. Smart contracts are most beneficial in business collaborations in which they are used to agree upon the decided terms set up by the consent of both the parties. This reduces the risk of fraud and as there is no third-party involved, the costs are reduced too.

How does a Smart Contract Work?

In order to understand how a smart contract works, let’s take an example where you wish to sell a property of your own. The process of selling properties demands a lot of paperwork as well as communication with multiple parties. Other than the communication complexity, it also involves the risk of frauds. In the current times, most of the people who want to deal in properties make their way ahead through real-estate agents. These agents are responsible for dealing with the paperwork and markets. They act as intermediaries in the overall process and work on negotiations and overseeing deal.

In such cases, you can’t rely on the person that you’re dealing with therefore, the agencies provide escrow services which transfer the funds from one party to the other. When the deal is finalized, you will have to pay both, the agent and the escrow service their commission in terms of the decided percentages. This leads to an extra loss of money and more risk on the seller’s end.

Enter Smart Contracts. Using smart contracts in such situations can result in more effectiveness by reducing the burden. Smart contracts are designed to work on condition-based principle (if this then that), which will resolve the ownership issue by transferring it to the buyer only when the monetary, as well as other conditions, are agreed upon. Moreover, when it comes to escrow services, smart contracts can replace those too.

Both money and the right of possession of the property can be stored in a distributed system which can be viewed by the involved parties in real-time. Since the money transfer will be witnessed by all the network participants, the chances of fraud are eliminated. Moreover, there’s no chance of an intermediary to be involved as the trust between parties is not an issue anymore. All the functions performed by the estate agent can be coded into the smart contract, thus, saving a considerable amount of money on both, buyer and seller end.

Eliminating the need for intermediaries make smart contracts even more attractive to apply in our lives. The usage of smart contracts is likely to gear up with the advancement of technology. Let us look at the benefits offered by smart contracts:


One of the basic characteristics of blockchain technology which is also shared by smart contracts is transparency. As previously stated, smart contracts are filled with terms and conditions in absolute detail which are also checked by the parties involved in the agreement.

This eliminates the chance of dispute and issues at the later stages as the terms and conditions are thoroughly checked and put into place only when all the participants agree to those. This trait of smart contracts allows the involved parties to ensure transparency during transactions.

Moreover, need for precision in contract detailing keeps all the information open with everyone which ultimately resolves anything related to miscommunication issue. Therefore, with the aid of smart contracts, efficiency lost in communication gaps can be restored.


In order to go ahead with any process involving documentation, it usually takes more than at least a couple of days. The delay in processes is due to a lot of intermediaries and unnecessary steps along the way. On the other hand, smart contracts are run through the aid of the internet as they are nothing but pieces of software code.

Therefore, the speed of completing transactions through smart codes is way too fast. Smart contracts can save hours or even days as compared to any traditional business process. Moreover, the time delay due to manual involvement is also eliminated.


A smart contract is coded in an explicitly detailed form. It requires to holds all the terms and conditions in it before it is finally put to work. Any condition that’s left out of the contract might result in an error while execution, therefore while creating smart contracts, all the conditions are put in the detailed form.

Due to this, the smart contract becomes a comprehensive agreement which when gets executed automatically, gets almost everything done. In the case of manual contracts, there are chances of errors as the person who is responsible for making a contract might miss one condition or the other. Moreover, there’s no way of even tracking it until the error is made. Therefore, smart contracts are a better alternative when it comes to achieving accuracy and precision.


Using smart contracts in place of traditional agreements can result in a lot of savings. First and foremost, as smart contracts only involve parties that are the part of the agreement; the need for middlemen is eliminated and the money involved in that is also saved.

As smart contracts are computer coded documents, the use of paper in the entire processes is eradicated. On one hand, this saves the cost while on the other, this is useful for companies globally as it helps them to save their bit of paper as well as costs usage in terms of contracts and promotes their contribution towards the society.


The properties of transparency and security make smart contract trustworthy in businesses. They obliterate any probability of manipulation as well as manual errors and establish confidence in their execution. Upon agreement on all the conditions, the contract automatically executes itself.

Another unique feature of these contracts may be their capability to significantly lessen the requirement of litigation and courts. Self-executing Smart Contracts allow parties to commit and bind by the conditions and rules written inside. To summarise, smart contracts usually work on a mechanism that involves digital assets along with multiple parties where the involved participants can automatically govern their assets. These assets and be deposited and redistributed among the participants according to the rules of the contract. Smart contracts have the potential to track real-time performance and save costs.


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