What Is a Smart Contract?

A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are traceable and irreversible.

Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism.

How Smart Contracts Work?

Smart contracts are tamper-proof programs on blockchains with the following logic: “if/when x event happens, then execute y action.” One smart contract can have multiple different conditions and one application can have multiple different smart contracts to support an interconnected set of processes. There are also multiple smart contract languages for programming, with Ethereum’s Solidity being the most popular.

Any developer can create a smart contract and deploy it on a public blockchain for their own purposes. However, many smart contracts involve multiple independent parties that may or may not know one another and don’t necessarily trust one another. The smart contract defines exactly how users can interact with it, involving who can interact with the smart contract, at what times, and what inputs result in what outputs. The result is multi-party digital agreements that evolve from today’s probabilistic state, where they will probably execute as desired, to a new deterministic state where they are guaranteed to execute according to their code.

Benefits of Smart Contracts

1.Accuracy, Speed, and Efficiency:

The contract is immediately executed when a condition is met. Because smart contracts are digital and automated, there is no paperwork to deal with, and no time was spent correcting errors that can occur when filling out documentation by hand.

2.Trust and Transparency:

There’s no need to worry about information being tampered with for personal gain because there’s no third party engaged.


Because blockchain transaction records are encrypted, they are extremely difficult to hack. Furthermore, because each entry on a distributed ledger is linked to the entries before and after it, hackers would have to change the entire chain to change a single record.


Smart contracts eliminate the need for intermediaries to conduct transactions, as well as the time delays and fees that come with them.

Key Takeaways

• Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code.

• Nick Szabo, an American computer scientist who invented a virtual currency called “Bit Gold” in 1998, defined smart contracts as computerized transaction protocols that execute terms of a contract.

• Smart contracts render transactions traceable, transparent, and irreversible.