What is a Smart Contract?

• Published on 08-Apr-2025, 12:00 UTC | Updated on 14-Apr-2025, 09:06 UTC
•  SmartContract
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What is a Smart Contract?

A smart contract is a digital agreement stored on a blockchain that automatically executes when pre-defined terms and conditions are met. These contracts are typically used to automate the execution of an agreement so that all parties involved can trust the outcome without the need for intermediaries, reducing time wastage. Additionally, they may initiate workflows automatically, performing the next action once pre-established conditions are met. Smart contract code is usually written in blockchain-specific programming languages like Solidity. It can be seen as a blockchain application that allows all parties involved in a transaction to fulfill their respective roles. Applications that utilize these contracts are often referred to as decentralized applications (dApps).

Why are Smart Contracts Important?

• Automation: The contract executes automatically without human intervention.

• Cost Reduction: Eliminates intermediaries and related fees.

• Speed and Accuracy: Removes errors from paperwork or manual processes.

• Transparency: Records on the blockchain are available to authorized parties.

How Do Smart Contracts Work?

Smart contracts follow simple "if/when...then..." instructions written as code on the blockchain. Once the preconditions are confirmed, a network of computers executes the desired operation. Like any other contract, a smart contract is a binding agreement between two parties but leverages blockchain technology for efficiency, transparency, and confidentiality.

Working Process:

1. Agreement: Parties agree on the terms and conditions of the deal and how the smart contract will operate (e.g., criteria for the contract to be completed).

2. Contract Creation:

   • Can be directly coded.

   • Alternatively, collaborate with a smart contract service provider.

   • Terms are written in a programming language like Solidity.

   • Security checks are critical at this stage.

3. Deployment:

   • Code is uploaded to the blockchain like a cryptocurrency transaction.

   • Once the transaction is confirmed, the contract becomes active and cannot be changed or reversed.

4. Condition Monitoring: The blockchain contract or another trusted source monitors events.

5. Execution: When the conditions are met, the contract performs the defined action.

6. Recording and Confirmation: The result is immediately published on the blockchain. The network confirms it, and the final version is saved.

Advantages of Smart Contracts

• Speed, Efficiency, and Accuracy:

  • Instant execution upon meeting conditions.

  • No paperwork or manual errors.

• Trust and Transparency:

  • Eliminates intermediaries.

  • Cryptographically secured records shared among all parties.

  • Information can't be manipulated for personal gain.

• Security:

  • Transactions are cryptographically secured.

  • Each record is linked to the previous and next one, making it difficult to alter the chain.

• Cost Savings:

  • Eliminates intermediaries for transaction management.

  • Reduces delays and extra fees.

Applications of Smart Contracts

With the growing popularity of blockchain, smart contracts are expected to grow at a Compound Annual Growth Rate (CAGR) of around 82.2% from 2023 to 2030. Large companies dominate the market share, as they have the resources to invest in the development and utilization of smart contracts.

Financial Sector: DeFi and Cross-Border Transactions

The financial and banking sectors can automate complex document and process workflows related to verification and documentation with smart contracts. This eliminates paperwork, improves payment accuracy, and simplifies tracking repayments. Smart contracts make tasks like identity verification and cross-border peer-to-peer transactions fast, manageable, and secure.

Real-World Example in Banking
We.trade, understanding the legal, financial, and cultural risks of cross-border transactions, developed a blockchain-based solution powered by IBM Blockchain and smart contracts. These contracts eliminate counterparty risks by automatically executing transactions once the conditions in the contract are met. Both parties receive signals for each action taken.

NFTs and Gaming

Smart contracts are also used in the gaming industry and NFTs (Non-Fungible Tokens) to automate transactions and represent legal ownership, replacing traditional legal systems with blockchain technology. Smart contracts enable players to own in-game assets, transfer characters between games, and even sell NFTs to earn revenue.

Real-World Example in Gaming
Cyber8, in collaboration with Synodus, created a sports game based on NFTs with a "Play-to-Earn" model. By integrating smart contracts, the metaverse can easily deposit/withdraw tokens, support NFT buying and selling, execute the "Play-to-Earn" model, and ensure platform integrity through confirmations.

Healthcare: Smart Management of Patients and Medications

In healthcare, smart contracts are used to store and encrypt medical records securely on computers. Only authorized individuals can access this data. They also help automate complex billing processes and reduce financial fraud and errors. Additionally, smart contracts can track medications from manufacturers to patients, maintaining their authenticity and quality.

Real-World Example in Healthcare
Encrypgen uses smart contracts to transfer DNA data from patients to researchers for clinical trials. These contracts help simulate DNA and discover new treatments and medications while facilitating access control, payments, and tracking individuals who access DNA data on the blockchain.

Real Estate Management

Smart contracts can revolutionize real estate management by:

• Storing ownership records.

• Reducing service costs by eliminating intermediaries.

• Automating property rights and licensing through smart contracts.

Real-World Example in Real Estate

• Mortgage processes, transparency in conditions, and removal of intermediaries.

• Tokenizing properties, allowing fractional ownership and reducing entry barriers for investors.

Logistics and Supply Chain: Tracking and Inventory Management

Smart contracts enable real-time tracking of inventory with full transparency. Managers can trace missing products to specific times and dates, preventing internal theft.

Retail: Vendor Management

In the retail and e-commerce sector, smart contracts make retail transactions cheaper, faster, and more transparent.

• Transaction Automation: Transactions with vendors and manufacturers are carried out through self-executing contracts.

• Conditions for Refunds or Exchanges: Contracts define the conditions necessary for issuing refunds or exchanges in case of disputes.

• Tracking Customer Behavior: Loyalty points or discounts are allocated to customers based on their purchasing behavior.

Entertainment and Media

Although it may seem that there is no link between smart contracts and the entertainment and media industry, in fact, there are many ways that artists and music recording companies can use this technology. Not only for protecting intellectual property rights but also for managing music-related transactions.

• Fee Control and Monitoring: Smart contracts help artists receive their fees on time.

• Elimination of Intermediaries: Artists do not need to hire managers or intermediaries, and they can directly reach listeners with their music.

• Cryptocurrency Payments: Fans can pay with cryptocurrency for their favorite songs and interact with other fans.

Real-life Example

• Choon: A music streaming platform based on smart contracts that claims to increase an artist’s revenue by up to 80%.

Human Resources Management (HRM)

Smart contracts also have applications in human resources management:

• Payroll Automation: Salary distribution based on working hours, performance, and company policies.

• Administrative Management: Claims processing, employee registration, and management of their qualifications are automated.

• Transparency in Hiring Processes: Smart contracts can simplify and make the job offer and acceptance process transparent.

• Certification and Training Records: Continuous and reliable validation and recording of certifications and completed training programs.

Voting

Smart contracts provide secure, transparent, and trustworthy solutions for conducting voting systems. In a blockchain-based voting system:

• Votes are cast online using private keys.

• A person’s identity is confidentially verified from trusted sources.

• An immutable and globally validated record is published on the blockchain.

Practical Examples

Although the use of smart contracts in voting is a promising technology, there are few public examples. However, examples of how voting functions with smart contracts and blockchain have been provided to demonstrate its effectiveness.

Identity Management

Existing identity management technologies have not fully prevented crimes or limited data control to the owners.

• Digital Identity: Smart contracts give owners full control over their data and allow them to share content whenever and wherever they wish.

• Increased Efficiency: Identity security, KYC verification, and overall data management are improved using smart contracts.

The Rise of DAOs – A New Corporate Structure

Since 2017, with the advent of blockchain technology in business, many Decentralized Autonomous Organizations (DAOs) have emerged.

• DAOs: Use smart contracts to code organizational structures and enable the automatic execution of complex incentive structures within corporate frameworks.

• Advantages: By using incentive structures that don’t require formal employment contracts, DAOs can help save on administrative costs.

Smart Contracts and Artificial Intelligence (AI)

Smart contracts equipped with AI will soon enter various industries.

• Combining AI and Smart Contracts: AI’s ability to process large data sets with decentralized blockchain security is leveraged.
  AI can use the automatic execution feature of smart contracts to create a secure environment for machine learning.
  In turn, smart contracts can benefit from AI’s advanced computational power and adaptive systems.

• Potential: Smart contracts equipped with AI will become sophisticated enough to solve advanced problems in various industries, enabling the creation of high-quality dApps and enterprise-level smart contracts.

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7. Types of Smart Contracts

Smart contracts can be divided into three main categories:

1. Smart Legal Contract:

• Based on the structure of conventional legal contracts (“If this happens, then …”).

• Provides more transparency than paper documents.

• Parties can agree by signing digitally; automatic execution if a specific condition is met.

• Non-compliance with terms can have legal consequences.

2. Decentralized Autonomous Organization (DAO):

• A democratic group governed by smart contracts that gives members voting rights.

• Blockchain principles determine the performance and budget mechanism instead of a manager or CEO.

• Example: VitaDAO, a blockchain-based community for scientific research.

3. Application Logic Contract (ALC):

• A piece of code that operates based on application logic, often interacting with other blockchain contracts.

• Facilitates interaction between different devices or within blockchain systems.

• Unlike other types, it is not signed between humans or organizations, but rather between machines and other contracts.

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Sources

• IBM - Smart Contracts

• Wikipedia - Smart Contracts