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Isha Parmar

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Smart Contract and Blockchain - everything you need to know


One of the most appreciated and sought after application of the blockchain technology is Smart Contracts. This automatic contracts are of immense interest to the businesses and is a bit discreet at the same time. In the blog, we shall discuss everything you need know about smart contract and blockchain.

Learn more about Smart Contract Development

This blog will help you to gain a thorough understanding of what exactly is a smart contract and the kind of impact they are expected to have on the modern day businesses.

THE BIG CHANGE - How centralized business model takes a step back and decentralization sweeps over scene

Traditionally, business follow a centralized- model. There is always a third party to ensure the proper functioning of the business in some section or the other. For example, if you make a transaction, the banks act as the third party between the two parties. If you execute a contract, a third party like the attorney ensures that the terms and conditions of the contract is meet to the utmost satisfaction of both the parties. Such third parties are everywhere.

A banking authority, law enforcement firm, a government establishment, each one of them is a third party who are such an integral part of the business that it is not possible to imagine the functioning of the business without them.

When the business owner builds a relationship with the client within a centralized model, businesses are bound to be dependant on intermediaries. This proves to be at risk for the customer. Besides, central intermediary systems can’t guarantee the payments and the perfect implementation of contracts at all times.

Now, here comes the role of blockchain technology. This is a new age invention that allows the businesses to function around decentralized models. It opens up new avenues through which businesses can do transactions and arrive at agreements without any dependence on third parties. Smart contract and its implementation is the gateway through which businesses around the world can arrive at this decentralisation.

Smart Contract - What exactly is it?

The concept of a self executing contract evolved around the same period as that of the blockchain technology. It actually made the initial buzz around twenty years ago when a US based computer scientist and cryptographer, Nick Szabo wrote an article in 1995 about self executing contracts.

Though the concept did not get a lot of attention at that point of time, Szabo presented the same concept that smart contracts mean today in almost precise manner then. He even included the idea of storting the terms and conditions of the contract in a distributed ledger. Well, that distributed ledger is what we know today as blockchain technology,

Now, that is a brief history on the conceptualisation of smart contracts and blockchain.

How can we define a Smart Contract?

A smart contract is just like a contract in the physical form that we normally employ in businesses. The only difference is that it is in a digital form and is represented by a small computer program that is stored inside a block in a blockchain network.

In other words, it is a software program in which rules of negotiating the terms of the agreement are stored. The program automatically verifies the fulfillment of the agreement and its conditions. If they are fulfilled, then the agreed terms are executed.

So, why do we need a smart contract?

The main reason why the modern day businesses should adopt smart contract and blockchain technology is that it eliminates the need of third parties when doing business deals. Both the parties can do the transactions directly. This enhances the trust between the parties.

Let us consider the example of a crowdfunding platform. Here, the project owners publicise their project and collect money from supporters and investors until a specific amount is obtained.

If such a crowdfunding platform is centralized, then it functions in the form of a third party between project owners and investors who donate their money. This process would in turn mean that both the sides need to trust third party involved and also, pay an additional fee to the third party to serve as an intermediary.

On the flip side, a smart contract does the same task, ie, crowdfunding process including sharing projects, setting goals, and collecting donations without a third party. Simply put, we can develop a program for a smart contract to execute all of these actions.

In the case of the crowdfunding a project, we can program the smart contract in a manner such that it will receive funds until a specified goal is reached. If the project manages to collect the stipulated funds before the deadline, the money raised will automatically go to the project owners. If the project fails to get the funds, the money will be reverted back to the supporters.

Now the role of blockchain in smart contract is that since a smart contract is stored in blocks inside a blockchain, no one is in actual control of the money that is being collected. In a decentralized business model, smart contracts has the ability to replace any other trusted third party.

Now, how can a business trust a smart contract?

The programmers design and develop the Smart contracts in the blocks within a blockchain and these contracts get implemented within blockchains. Due to this feature, the smart contracts inherit some properties that are inherent to blockchain technology. These properties render smart contracts all the more accountable, reliable and trustworthy.

  • They’re immutable

This implies that a smart contract can never be altered and no one can tamper with the terms and conditions of the contract or eventually break a contract.

  • They’re decentralized.

The final outcome of the contract needs the consent and validation of everyone in the network, just like any other transaction on a blockchain network. Decentralisation makes it almost impossible for an attacker to control the release of funds since all other participants would detect such an attempt and mark it as invalid.

How does Smart Contract Works

A smart contract is a computer program, or more simply, code. The code of a smart contract contains specific terms that are executed when mutually agreed events take place.

Let us consider a very simple day to day example of how a smart contract would change the flow of things for an apartment renting scene. X has a apartment in a city that he wants to rent out. Y is someone who is looking for a place to stay in that city. Now, we have the two parties at hand.

  • Conventional method

In usual circumstances, X and Y would approach some real estate agents that brings together the owner and the tenant to agree on the terms and conditions of the renting. These agents act as third party and will take up the responsibility of ensuring that the agreement is followed. For their services, these real estate agents will charge a handsome sum of money as fees from X and Y. the catch here is that though they may take up the responsibility of the compliance of the agreement, they cannot ensure that it will happen and if at all some issues occur, then dispute solving and resolving will take up a lot of time.

  • Smart contract Method 

If X and Y make an agreement using a smart contract, then it will act as per the algorithm and will guarantee that all the agreed terms and conditions are fulfilled. Immutability of the smart contract will ensure that both X and Y cannot cheat each other.

If X and Y use a smart contract for the renting process, the following terms and events will unfold.

  1. An independent storage will be created, where both X and Y can put value . they cannot take off the value easily.
  2. Y puts money for rent in this storage.
  3. X enters the address and the code to enter the apartment in the same storage.
  4. X gets payment confirmation and Y receives the address and apartment code.
  5. If Y comes to the city and the address and code provided by X are correct, X will get the money.
  6. If the address or code supplied by X are wrong, Y gets his money back.
  7. If Y doesn’t come to that city, X will get her liquidated damages payment andY gets the rest of what he previously paid.
  8. At the end of the rental agreement, the smart contract is deemed fulfilled and remains stored in the blockchain network for ever.

This is an example of the most basic one-time smart contract. Setting up the terms in the code of a smart contract ensures that there is a satisfactory fulfillment.

On the whole, the contract fulfillment is guaranteed by the blockchain technology since a complete copy of the blockchain is publicly stored by all the participants in the network and the smart contract remains immutable forever.

Once X generates a smart contract that automatically and transparently works for him when renting out his apartment to Y, he can get into creating a universal agreement for all further renters so that he does not have to create a new smart contract for each new guest.

With this universal agreement, anyone on that particular blockchain network can rent X’s apartment by following the algorithm above. The potential tenant transfers rent payment, gets the address and apartment code, and then X gets his payment if everything works according to the contract terms agreed by the both sides.

Thus,, smart contracts can be universal. In fact, we can take this to another level by programming a smart contract that can be used not only by X but by any other person who wants to rent out their flat. The smart contracts can also have more specific conditions, such as automatically adjusted prices, discounts, partial rent payments etc.

Blockchain Networks that use Smart Contracts

We discuss smart contracts with respect to blockchain technology. Now, the interesting aspect is that there are a lot of blockchain networks that are implementing smart contracts within it. The major examples are ethereum and Bitcoin. 

  • Bitcoin

It is the world’s first popularly accepted cryptocurrency. Bitcoin is mainly known for transactions of the Bitcoin cryptocoins. However, its protocol can also be used to develop smart contracts. Bitcoin offers a programming language that permits custom smart contracts like multisignature accounts, payment channels, escrows, and time locks. Specifically , there’s a separate smart contract platform called RootStock that is built solely on Bitcoin’s blockchain.

  • Ethereum

Ethereum is the most popular smart contract framework. It is created and designed specifically to support smart contracts. This framework is programmed in the Solidity language. It is a decentralized platform that runs smart contracts without any possibility of downtime, censorship, fraud, or third-party interference. The database of the Ethereum blockchain stores transactions between people, transactions involving smart contracts, and their respective source code.

Benefits of Smart Contracts

Smart contracts have explicit programming algorithms in its core and exclusive blockchain properties like decentralization, transparency, fraud resistance, hacker proofing and others under its belt. This makes smart contracts a very credible alternative for establishing business relations and performing transactions between the parties involved.

As an alternative to the conventional business contracts that are done in a centralized manner, the smart contract and its associated decentralization offers the following benefits.

Direct involvement with clients : . Smart contracts eliminate the need for any kind of intermediaries in a business deal and enables a transparent and direct relationship with their customers.

Failure proof : . Since businesses does not depend on a third party any longer, no single person or a single entity is in control of data or money. Decentralization ensures that even if any individual leaves the blockchain network, the network will continue to function with no loss of data or integrity.

More trustworthy. Business agreements are automatically executed and enforced without human intervention. An added benefit is that these agreements are immutable and are therefore unbreakable at any cost.

No fraudery : Since smart contracts are coded and stored in a distributed blockchain network, their outcome is validated by mutual consensus of everyone in that network. Therefore, no one can control the release of other people’s funds or data since all other blockchain participants would spot this in an instant and mark any such an attempt as invalid.

Cost efficiency: Eliminating the intermediaries from the system removes the additional fees. This allows the businesses and their customers to interact and transact directly with each other with the additional perks of low to no fees for transactions.

Record keeping: All the contract transactions are stored in a chronological order in the blockchain and can be accessed by anyone on the network along with the complete audit trail.

Smart Contract Use Cases

Smart contracts are gaining popularity as we speak and have already been implemented in various blockchain projects around the world. Here are just several examples of application of smart contract and its promising implementations in different industries.

  • Banking

Banking might be one of those industries in the forefront where smart contracts appear to be the most significant alternative to the traditional model of transactions. Smart contracts make the whole system automated. This includes payments as well as loans, and nearly all others financial operations.

KYC-Chain is one such project that implements smart contracts for individuals, businesses, and financial institutions. In the core of KYC-Chain, there are mechanisms that allows the clients to comply with regulatory norms, such as automatic smart checks, as well as to share pertinent documents and get them digitally attested by notaries and institutions.

Blockchain technology also enables the users to do international money transfers in a matter of seconds at almost no charges. To know more about it, click here.

  • Healthcare

Smart contracts can also improve the healthcare system in a great way. With the setting up of permissioned blockchain network, you can set up health records and grant entry only to whom you wish. You can streamline processes for insurance trials, increase the access to cross-institutional database, and be confident of patient privacy. Authentication, authorization, and identity confirmation will remain open issues for smart contracts executed on blockchain networks.

Some companies aims to bring patients and doctors together in communities to improve health care and make it affordable worldwide.

  • Supply Chain

Supply chain management has adopted smart contracts and blockchain technology wholeheartedly. Infact, it was one of the first business vertical that adopted the technology. It can grant real-time visibility is supply chains, right from the deals to the customers, all the while it changes hands. Smart contracts also ensure that provides granular inventory tracking, benefitting supply chain financing as well as reducing the risk of theft and fraud.

Smart contracts can effectively be used anywhere in the world regardless of marketplace ,type of commodity that is being sold or the nature of service being sold. For example, Name Bazaar is a popular supply chain company that is implementing smart contract technology in a framework of peer-to-peer marketplace. Here, the users can exchange cryptographic assets on the blockchain in the form of domains.

Know about crypocurrency exchanges

  • Legal Issues

This is one sector where blockchain technology has immense scope for application. The traditional and age old model of resolving legal issues and certifying documents is through notaries and lawyers. This is making way to smart contracts. These smart contracts eliminate the need for notarization, thereby offering not only an automated and unbiased option but also a very cost-efficient solution.

There are certain websites online which illustrates the concept of notarizing documents using the Ethereum blockchain.

  • Real Estate

We have already seen how smart contracts help in the renting process. That is one of the easiest concept of how a smart contract can be employed for real estate . Of course,it is a fact that these projects will be a bit more complicated in real-life. They are a bit more comprehensive and will need to cover a broad range of issues and opportunities that may come at hand. For instance, there are certain companies that are stock markets for real estate. They use blockchain technology to enable the users to make property transactions, gain financing, get fundings and manage the leases

  • Governmental purposes

Researches are being done to investigate the potential impact of decentralization and related technologies on monopolistic spheres like government systems. 

Certain companies are working towards providing voting through smart contract and blockchain and other tools that will aid in ensuring fair democratic process of electing the leaders. Particularly, these companies intends to provide a blockchain-based voting ecosystem. It supports secure and very cost-effective election campaign operations as per a range of election types and voting parameters. The primary goal of these companies is to enable transparent and unbiased voting in federal and democratic countries around the world.

Internet of Things Networks

There are certain areas where smart contracts intersect with other technologies. The Internet of Things or IoT in short is one of them. A right combination of smart contracts and IoT is very powerful and can provide significant transformations across industries. This will pave the way for new distributed applications. The technology provides IoT hardware and software by coupling with blockchain technology. This enables the system to used to various real life needs at almost a fraction of the price.


Contrary to the traditional centralized business models, smart contracts can foster a new kind of business relationship between the parties built on mutual trust.

By inheriting the properties of blockchain technology, smart contracts can offer immutability and distributed storage which distinguishes them from conventional agreements. Immutability and decentralised storage options allow smart contracts to become a reliable means for making business agreements and performing monetary transactions.

Blockchain technology is already impacting businesses around the world. Of course, this will not happen in a short span of time, but we can definitely embrace the technology and set the wheels in motion.

If you are interested in smart contract development and blockchain application development, walk into Crypto Softwares today.