Defined in simple terms: What are smart contracts?

July 9, 20255 min read

TLDR;

Smart contracts are blockchain-based contracts that are automatically enforceable when preset conditions are met

Smart contracts don�t require an intermediary to check whether the conditions are met

They offer speed, accuracy, transparency, and trust

Smart contracts enable two or more parties to fulfill their obligations under a deal without the need for an intermediary. The terms of these contracts are defined using lines of code baked on a blockchain network like Ethereum, Solana, or layer 2 networks like Polygon. But what are smart contracts? Here, we explore how smart contracts are created, how they work, and their advantages compared to conventional contracts.

What are smart contracts?

Let�s evaluate a vending machine. Yes, we're discussing smart contracts. A vending machine is wired to dispense items depending on your selection. The machine checks whether the cash provided is less than, enough, or in excess. Where it�s less, you are asked to add more, and if it�s more, you receive your change and get your desired item. All without an intermediary, the instructions are already set.

The same goes for smart contracts. They are like virtual vending machines that support usage from a global audience. For example, one contract may only allow the transfer of land ownership from person A to person B when person B has deposited a pre-agreed amount into a crypto wallet.

Smart contracts live on the blockchain. This means that decisions made on a smart contract are permanently recorded on the blockchain. To hide the complexity of using smart contracts, developers provide web interfaces to define how users interact with them. The interface may define the type of data the contract needs and the terms & conditions of using the contract.

Smart contracts should not be confused with decentralized applications (dApps). Note that a dApp is made up of one or more smart contracts.

In simple terms, smart contracts are blockchain-based lines of code that execute business logic.

How are smart contracts created, and how do they work?

Smart contracts are created using lines of computer code and follow �if/when�then�� logic. The logic defines the flow of events and actions that users need to complete to unlock the contract�s power. A smart contract can contain as many conditions as needed, depending on its intended application.

Smart contracts also include instructions on how and who can initiate upgrades or downgrades to their logic.

The creation of a smart contract starts with defining what the contract is supposed to achieve. All variables and how the contract responds to errors or wrong input must also be defined beforehand.

What are smart contracts: Programming languages

Smart contract developers use different programming languages depending on the blockchain and how they want users to interact with it. For example, developers who want their smart contracts to be accessible using a web browser use the WebAssembly (WASM) language.

Solidity is another popular smart contract programming language among developers creating applications on blockchains powered by the Ethereum Virtual Machine (EVM). EVM-based decentralized networks include Ethereum, BNB Chain, Optimism, Fantom, Celo, Avalanche, and Polygon.

The Digital Asset Modeling Language (DAML) is also commonly used in scenarios where developers want to add privacy features to contracts. Other commonly used smart contract programming languages include Rust, Vyper, Go, Python, C++, and JavaScript.

Most common smart contract use case

Creating and managing cryptocurrencies - The creators of ETH, BTC, SOL, and other cryptocurrencies use smart contracts to define the currency's parameters like how many tokens are in circulation at any one time, transfer between users, how new currencies are generated, etc.

Supply chain management - smart contracts can be used to help smooth the interaction between different parties in a supply chain. These include ensuring that invoices are paid and goods are delivered.

Creating and governing corporate structures - In the blockchain and decentralized world, corporate structures are represented as decentralized autonomous organizations (DAOs). A smart contract defines the power of DAO members, how they propose and vote on issues, among other functions.

Other smart contract use cases include real estate, insurance, legal, gaming, healthcare, Internet of Things (IoT), and emerging technology.

What are smart contracts: Advantages of smart contracts

Improves accuracy and efficiency - With smart contracts, code is king. As such, instructions are honored once all the conditions are met without delay, promoting efficiency. Without processing paperwork and involving intermediaries, the accuracy of smart contracts is guaranteed.

Enhances transparency and trust - Smart contracts require no human intervention to operate, increasing the trust between parties in a transaction.

They�re secure - The data involved in a smart contract is permanently stored and encrypted on the blockchain, making it hard for threat actors to maliciously extract it.

They�re less costly - Smart contracts are less costly to use because they eliminate middlemen and other intermediaries that tend to inflate the cost of a transaction or business process by charging high fees.

Conclusion

What are smart contracts? These are binding contracts defined by computer code stored on the blockchain. Although they have many use cases and advantages, they have their flaws. For example, if the smart contract code is flawed, the outcome will also be flawed since there�s no human to check the accuracy of the outcome before it�s performed. Malicious actors can also exploit smart contract flaws to steal users� funds,