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A Simplified Approach to Smart Contracts

What are smart contracts?

According to Wikipedia, “A smart contract is a computer program or a transaction protocol that is intended to automatically execute, control or document legally relevant events and actions according to the terms of a contract or an agreement”.

Thus, smart contracts are self-fulfilling contracts on the blockchain. Their coding takes place within the network and execute automatically when certain conditions are met. This execution of the contract may be partial or complete, depending on the conditions. They are especially essential for Web3 applications, as they take control away from a central party.
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How do smart contracts work?

Smart contracts are analogous to a nested ‘IF’ formula in excel. If a certain condition is met, it executes. The processor moves to the next possible outcome if it is not met.

For example, imagine a coffee shop introducing a rewards program.

  1. Customers buying 10 coffees a month get 1 free.
  2. Those buying 15 coffees a month get 2 free.
  3. While those buying 20 coffees a month get 3 free.
Another condition could be that the deal is valid for the first 100 customers only. The coffee shop can create a single blockchain contract that considers all these conditions. Once any of the parameters are met, the contract self-executes and releases coupons for the free coffees to the customers.

Though in blockchain, it is a bit more complex. Since there is no central authority, a single node cannot execute a contract. As opposed to this, the contract is executed by a host of computer nodes. Once this happens, the transaction is marked as complete and the blockchain is updated.

Potential Applications

Smart contracts are applicable to a host of real-world applications. Already, various functions within DeFi, like lending and staking, use them. A smart contract can link you to any virtual item you own on a GameFi platform. These contracts can also be applicable in trading securities or crypto.

Here is a list of other avenues that could improve:

  1. Supply chain management will complete traceability and transparency.
  2. Real Estate for mortgage and escrow.
  3. Medical applications like keeping patients’ profiles, and having their files and prescriptions.
  4. Insurance resolutions between conflicting parties.
  5. Legal contracts between individuals or corporate entities.
  6. Online voting for candidates in countries that have a democratic government. Or, voting on a bill or legislature.


As no modification is possible on blockchains, smart contracts are highly secure. The decentralized nature of blockchain also ensures that interested parties can enter into agreements through smart contracts, without an intermediary. Whenever a condition is met, the contract is executed. This execution is automatic, and there is no manual work required, thus eliminating errors. Since all parties can view the records, this maintains transparency and builds trust.

Most smart contracts are based on Ethereum, since that was the blockchain that introduced the concept. However, Solana which refers to them as programs is proving to be popular too. Since these blockchains are public, all transactions are visible to the network participants. But some people may not want their contracts to be publicly available. The introduction of private smart contracts by Hyperledger Fabric solved this problem.

Private contracts may work for organizations that wish for confidentiality. But the downside is that malicious parties may also make use of private smart contracts for their benefit.

The coding for these contracts needs to be precise, with a consideration to all kinds of inputs. Moreover, bugs and errors during the coding of a smart contract may impact the outcome. These challenges are a hindrance to the more widespread use of smart contracts.
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