What are Smart Contracts and how do they work ?

Before we define Smart Contracts, we have to address the bedrock upon which the concept of Smart Contracts is actually based – Blockchain.
Based upon the three core fundamentals – Decentralisation, Transparency and Immutability, Blockchain is a type of Distributed Ledger Technology (DLT) that stores data in blocks that are then linked together via a cryptographic signature called hash.

What are Smart Contracts ?

Smart Contracts, on the other hand, are stored on Blockchain that are automatically executed when predetermined terms and conditions are met. Bypassing the role of intermediaries, Smart Contracts automate the execution of an agreement, making all the parties certain of the final outcome. The three focal points of it are – traceability, transparency and irreversibility of transactions.

How are both related to one another ?

Now from the above descriptions, it is clear that Blockchain is the base upon which Smart Contracts work. They both are coupled to each other and form a decentralized system where the users directly deal with one another without any interruption. Smart Contracts are stored in blocks that are connected to each other and every user holds a copy of the stored contract. This makes the system of transactions, exchanges secure, preventing any kind of exploits that can take place in the network.

How do Smart Contracts work ?

Smart Contracts as we know are tiny computer programs stored inside a Blockchain that are executed automatically when a particular condition is met and verified. Their workings can be defined through “if/when…then…” statements that are written into code on a blockchain.

Step 1 – It all starts by defining the terms of the contract, same as in the traditional contracts. Once the terms of the contract are finalized, they are translated into a programming code, where all the action takes place.

Step 2 – The next step is to test the logic of the programming code. A Smart Contract writing platform is used in this case by the developers to run through the logics and test them thoroughly.

Step 3 – Once the code is tested and created, it is then stored on the Blockchain network where it gets passed on to every user on that network, constituting a decentralized system.

Step 4 – Smart Contracts are configured w.r.t. the event updates. If the term of the contract is satisfied and verified by all the users on the blockchain network, the code is run and the relevant transaction takes place.

Note – There can be as many events as required that need to be triggered to execute the transaction at the end. Apart from this, a careful consideration also needs to be given towards the exceptions. Because they can stop a particular condition to meet and thus delaying the execution of the transaction.

Smart Contracts and their industrial applications

Smart Contracts with their transparent nature can change the face of how businesses work. Different industrial domains execute numberless written contracts throughout their business cycle. But these traditional contracts have become archaic and carry with themselves the burden of unmanageable stuff that can lead to business and legal conflict, affecting businesses from top to bottom.

And to overcome this, Smart Contracts play a role to simplify trade between two or more parties.

Now let’s have a look at the application of Smart Contracts in different industry domains.


The travel and tourism sector is a huge and fragmented sector, contributing largely to the global economy. In-between a traveller and a service provider, a huge chain of intermediaries exist. And because of these middlemen, Blockchain and Smart Contracts need to make their way into this industry.

Smart Contracts can be deployed, connecting the traveller directly with the service provider like airlines, hotels, cabs, tour guides, adventure sports etc. This will streamline the experience and would also cut-down additional costs from both sides

The other side of reducing the middlemen is that Smart Contracts ensure safe transactions, enhancing a mutual trust between the traveller and the service provider. Transaction processes will get additionally accelerated and automated with the use of Smart Contracts.


Just imagine how smooth the overall process will become, if a patient avails a healthcare service just by fulfilling a pre-set criteria in the Smart Contracts. All the inefficient manual processes will be discarded and there will never be any time delays, ensuring a hassle-free experience to the patients.

Smart Contracts can also find their application in wearable devices. Wearable devices today have multiple health tracking systems. Smart Contracts can be programmed when a threshold level is breached and it gives an alert to the person, who can take timely action. Smart Contract can also help alert the close ones or the physician/doctor of the person who can track his/her location and reach out on time.

Another area where Smart Contracts can play a defining role is health insurance. If a person uses Smart Contract to buy health insurance and goes through a medical procedure that is covered under the insurance, the Smart Contract would get automatically triggered. The money will directly go to the hospital, speeding up the process and cutting down all the delays.

Real Estate

The real estate sector consists of extensive legal procedures, a lot of paperwork and the involvement of mediators, which consumes weeks, months or even years. Addition of Smart Contract removes all the inconvenience in a single go !
Smart Contracts give the buyer and the seller the freedom to determine their mutual terms of agreement, saving the extra costs that were being consumed by the traditional middlemen. All the necessary fees, commissions, charges etc. become irrelevant.

The traditional process also accounts for low liquidity in this sector. Adoption of Smart Contracts will boost the liquidity as the transactions will be accelerated, making the property become accessible globally.

Banking & Finance

Smart Contracts can really help sort out the lending issue by the financial institutions. Well-defined T&Cs can be set, and when any person satisfies these conditions, the Smart Contract gets triggered. This will drastically shorten the time scale with which one can borrow money from the institutions/investors.

Smart Contracts also bring transparency and smooth functioning in the day-to-day processes like account opening, transactions etc. It discards the secondary validation processes and also raises concerns if anything mismatches with the pre-defined set criteria and solves the issue immediately.

Banking industry is also prone to hacks and frauds. As Smart Contracts work on the fundamentals of Blockchain, they heighten the security standards. They can help banks streamline the KYC process from which the customer identity and history can be easily verified and traced down.

Supply Chain

Smart Contracts can help streamline the payment process between the parties. For eg – a digital wallet and a Smart Contract could be set up, and when the supplier gets the order from the manufacturer, the Smart Contract would automatically move the payment from one wallet to the other.

Some goods during the transit process require careful attention, be it temperature check or damages etc. Smart Contract can be modelled with temperature monitors and would send an alert if out-of-range temperature occurs. This can be very useful in case of pharmaceuticals, drugs, perishable fruits and vegetables etc.


The confidence in Blockchain is growing rapidly. Industries across the globe are overhauling their business processes to adopt this cutting-edge technology. And with the growing trust in it, Smart Contracts in the coming years will also become mainstream.

Though there are two primary concerns that need to be addressed :

T&Cs that the Smart Contract holds should truly reflect the legal intent, else the use of these will be totally futile. The code and the necessary legalese should be in sync with each other.

The decentralized part also conveys another side of the story where lack of central authority can make the aggrieved party feel vulnerable and helpless.

The concept of Blockchain and Smart Contracts is still at its nascent stage. Over time, the challenges will be addressed and solved. But the market disrupting capability that it brings with itself cannot be ignored. Thus it is inevitable that Blockchain and Smart Contracts will become a new normal in the coming future.

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