What are smart contracts on blockchain?

Imagine a scenario where you rented an apartment and paid a deposit for damages. The landlord promised to return your deposit when you move out. But when you did, the landlord claimed damages, and you disagreed. You then involved lawyers, and the court process dragged on for months.

This is one of the instances where traditional contracts fail. People make agreements, but circumstances change and disagreements arise. There’s also a need for middlemen to enforce the agreements and determine outcomes. Smart contracts aim to solve these problems.

Smart contracts are self-executing programs that run on a blockchain and carry out agreements once certain rules are met. So no one needs to enforce them.

Think of a smart contract like a digital escrow where two people agree on a deal. The smart contract holds the money, and once the agreed conditions are met, it releases it. If the deal fails, it automatically refunds the money. Or imagine a smart contract as an automatic door. If you walk up with the right key, the door opens. It doesn’t need a guard and you don’t need to answer any question.

While smart contracts automate the enforcement of digital agreements, they can’t enforce actions in the real world. For example, delivering physical goods. If real-world disputes arise, human intervention may still be necessary.

How smart contracts work

A smart contract starts as a digital agreement between parties. Each party agrees to a set of conditions. Developers then write these conditions into code using languages like Solidity.

This code defines rules and outcomes. It sets clear instructions: if one thing happens, then do another. For instance, if a payment comes in, then release access to a file or product.

Once the code is ready, developers deploy it to a blockchain. This step locks the contract in place, and every computer on the network stores a copy.

After deployment, the contract becomes part of the blockchain. From that point, it continuously monitors for the conditions that must be met to trigger execution.

Sometimes, the contract needs outside information. For that, it connects to trusted sources called oracles. These oracles feed real-world data, such as weather reports or delivery updates, into the blockchain.

So once all conditions are met, the contract takes action. It might move money, assign ownership, or update a record. Every result from the contract appears on the blockchain, and no one can erase or fake these records. Everyone involved can also see and verify what happened.

After the contract finishes its task, the result becomes final and irreversible.

Benefits of smart contracts

Smart contracts remove the need for intermediaries in many transactions. Traditional agreements often need lawyers, banks, or other third parties to oversee execution. These intermediaries add costs and delays. Smart contracts remove this friction by allowing parties to deal directly and execute agreements automatically.

Unlike traditional contracts, which rely on trust that all parties will honor their commitments, smart contracts build trust directly into the system. This is because they are written in code, and code can’t lie or change its mind. Once deployed, a smart contract executes as programmed, and everyone can see the outcome.

Smart contracts automate trust for digital actions, but they still depend on accurate data inputs. For example, if a contract relies on external data, like delivery confirmation, that trust shifts to the data source or oracle providing it.

Smart contracts also increase accuracy by eliminating human error. People can misread terms, miscalculate amounts, or skip important steps, but smart contracts follow their code exactly every single time.

Code executes exactly as written, but it can contain bugs or unintended logic. If the code contains a bug, the contract may not behave as intended.

They inherit the transparency and security of blockchain networks like Ethereum. Once you deploy the contract, no one can secretly alter it. And because the contract is publicly accessible, anyone can read it and verify what happened.

Finally, smart contracts reduce costs since there’s less paperwork, fewer intermediaries, and fewer steps.

Smart contract use cases

You can use smart contracts to automate various business processes and tackle complex challenges. The following examples show how this technology can transform operations across different industries.

Real estate transactions

Property sales traditionally involve multiple intermediaries. For instance, real estate agents coordinate inspections, title companies verify ownership, escrow services hold funds, lawyers review documents, and banks process mortgages. This complex process often takes weeks and costs thousands in fees.

Smart contracts simplify these processes. Buyers deposit funds into a smart contract, which automatically verifies ownership records. Once all conditions are met, the contract instantly transfers ownership, releases funds to the seller, and updates title records on the blockchain. The entire process can be completed in hours instead of weeks, with fees dropping from thousands to just hundreds of dollars.

Insurance

Insurance claims often lead to frustration. Customers wait weeks for payouts, while insurers spend time and money investigating each case. Fraud concerns further slow the process, and administrative costs eat into customer premiums.

This process becomes far more efficient with smart contracts. Flight delay insurance is a clear example. A customer buys coverage through a smart contract. The contract monitors flight data in real time. If a delay passes a certain limit, the contract pays out instantly. The system checks trusted data sources and executes the payout automatically, removing the need for human approval and reducing fraud risk and time.

Supply chain management

Modern supply chains span multiple countries and involve numerous companies. Products pass through manufacturers, distributors, retailers, and logistics providers, making tracking complex. Fraud is common, and quality issues often arise without clear accountability.

Smart contracts introduce transparency at every stage. Each party scans products at transfer points, and the smart contract records every event securely and permanently on the blockchain. Anyone, including the customer, can verify a product’s origin and whether it was tampered with. When quality issues occur, the system can trace them back to the exact supplier. Payments are then automatically triggered once goods arrive and meet the agreed conditions.

Wrapping up

Smart contracts represent a shift in how we create and enforce agreements. By turning promises into code, they automate trust, reduce friction, and minimize the need for intermediaries.

As blockchain technology evolves, smart contracts are likely to become even more versatile.