What is a smart contract?

In light of Nick Szabo’s realization that decentralized ledger technology could be leveraged for smart contracts, which could be converted into computer code, stored, and replicated on the system under the supervision of the computer network tasked with keeping the blockchain running which marked a great breakthrough at the moment to make it, “the blockchain”, more self-proficient.

By - June 20, 2019
Ongoing digital transaction

Smart Contracts explained for Beginners.

Smart contact is no new invention, but an ancient discovery by Nick Szabo, a prominent computer scientist, and cryptographer, who first proposed the idea in the 1990s, is that far back it has been seen to be helpful in various fields of tech such as shipping and logistics and finance & banking, unit 2008 when it was incorporated in digital currencies under Bitcoin.

In light of Nick Szabo’s realization that decentralized ledger technology could be leveraged for smart contracts, which could be converted into computer code, stored, and replicated on the system under the supervision of the computer network tasked with keeping the blockchain running which marked a great breakthrough at the moment to make it, “the blockchain”, more self-proficient.


Of course, unlike a normal contract, which is drafted by a lawyer, signed by partaking parties, and enforced by law, a smart contract sets out a relationship with cryptographic code.

As I sail further of coast my wildest guess is many are familiar with the term contracts, as of this Era one is ought to make one at least a couple of times in their lifetime. Basically, it’s alphabetically written, drafted by a legal counsel, signed by partaking parties and enforced by law. On the other hand, A smart contract is a cryptographic code running on top of a blockchain containing a set of rules under which the parties to that smart contract agree to interact with each other in an independent level excluding a third party.


How smart contracts work.

All the basics about smart contracts are almost said, but how all this works out is still unknown, before you hung your thoughts to dry think of a regular contract it’s more or less the same logic.

This is what happens smart contracts are self-executing statements written into lines of code. Marked as if statements which are supposed to execute if all parameters are met as instructed if returns are not met an alternate action is taken.

Look at this like a vending coffee machine, you insert coins into the machine make a selection of your coffee delicacy for the right money and correct input you have yourself your money’s worth a fine espresso maybe.

Back to smart contracts they are executed within a blockchain which is made up of a decentralized network of computers called nodes that store data and also process and verify all transactions due to the fact that these computers are decentralized they are under regulation by any individual or organization this also makes the Immune to hackers because they would take forever trying to get through the nodes with this I can say that smart contracts can carry out transactions effectively and automatically.

Why smart contracts?

In the real world, of course not the mythical world, if an anonymous person came to you with a deal of let’s say selling a motor vehicle, which is second hand and has proof of ownership it’s not quite enough right? because according to the law you have to prove beyond reasonable doubt of proof of ownership otherwise whatever mystery lies behind this property you have acquired it will rain hail storm on you when the time for accountability rises.

smart contract illustration

It’s so much for humans not being trustworthy, that being out there makes it very difficult for one to just entirely make a deal based on words and on paper contracts because even those can be altered at will to satisfy a different interest of one party with more influence.

Some of the key properties of a smart contract are:

  1. Autonomy
  2. Decentralization
  3. Auto sufficiency

Autonomy the capacity for one to act in accordance with objective morality rather than under the influence of a third party, as far as this is concerned with smart contracts after a deal has been launched the initiator doesn’t have to participate anymore in the process that makes these contracts smart is the various network points that are distributed and this qualifies them to be decentralized

This ultimately takes the would be considerable risks off the table such as hiring lawyers or middlemen and third-party manipulation of any sort since the network automatically takes care of proceedings stored in the blockchain

Decentralization this is a key factor that eliminates all intermediaries which reduce transaction costs and also grants access between all permitted parties which saves time and reduces the conflict margin

Imagine having to lend an anonymous person far out in New Zealand money while you are in Australia or maybe participate in crowdfunding of a billion-dollar company as a small scale investor by investing a few dollars, this might require getting legal representatives filling for approval signing contract meetings, etc. Which is discerning, but not a viable business option since the preparation costs are most likely to surpass what might be available to invest, but the light at the end of the tunnel here is that you with smart contracts all this is possible without breaking a sweat.


Its ability of self-execution, it should be, should not get overlooked is that these Smart contracts greatly reduce transaction costs.  The Auto enforceable code – whether on the protocol level or on the application level – standardizes transaction rules, thus cutting on the enforcement costs of reaching a mutual conclusion formalization and required implementation.


Examples of mart Contracts


For many, insurance, which is a legitimate business, is considered a scam, it does come through at times truth be told, but the hustle involved goes without saying.

Its structural design lacks an automated administration. This makes it work at the speed of a turtle which makes its efficiency poor the maturity time for insurance claims varies from one insurance company to another.

For the customer, it’s a significant delay which breeds disturbance and dissatisfaction with the services rendered when insurance claims take ages leading to accumulating admin costs, surfeit and to crown it all inefficiency.

Now this is the cutting point where smart contracts play a crucial role to skip all these hurdles for a much better reliable option whose process simply executes by automatically triggering a claim when a certain event occurs for instance, if one’s house caught fire, the cause of the fire would be determined and the extent of damage ascertained, all this information is securely recorded on a blockchain which will concurrently work the mechanics to determine the amount of compensation.

Real Estate

Let’s suppose are moving out of your house for business in a different location, but you have so much attachment to this house so you require to put it up for rent with the current “working system” you will need to get a middle man that will get tenants collect rent and all follow up activities this, however, is a tone of expenses which are not completely dependable in case of rip-offs. So imagine there existed a booking.com which is designed on a blockchain platform accepting both cryptocurrency and fiat currency, which issues a digital receipt on the recipient of payment as instructed in the smart contact where you can put up your property for rent and systematically work all the transactions in the blockchain and secured by the smart contracts.

It would also be obvious that the access to such premises will definitely have to be digitized and allow access from the internet, which Of course is apparent technology today. In the near future Internet of things and blockchain will work hand in hand, giving rise to industrial integration with blockchains.

For those unaware of, the “Internet of Things” is the network of physical devices like home appliances that are embedded with software and sensors that enable them to connect and exchange data over the Internet.

Application in Healthcare.

Today, many want to keep their personal health concerns a secret, however, the paper trail doesn’t really guarantee them this privilege, but with the health-related blockchain platforms that have been started, it will be in a position to grant this privacy. Personal health details belonging to an individual will be encoded and stored in a blockchain secured by a private key with limited access.

The outcomes of such a platform would result into the proper tracking of one’s health, scheduling of treatments and paying for them, billed receipts can be forwarded to insurance companies which would in return effect reimbursement which will promote healthy living and reduce on time wastage. On the side of the health institutions, general health care management can be improved and inventory can be kept in check so as to keep a constant supply of resources.


Ethereum smart contracts

Ethereum is not only a currency but also a platform that creates an opportunity for other blockchain apps to be built on it. The Ethereum blockchain works similarly to that of Bitcoin blockchain, however, Ether works more as a fuel that is needed to work out some functions, in this case, the smart contracts and applications on the Ethereum blockchain. With Ethereum, every time a program is used, a network of thousands of computers processes it.

Contracts written in a smart contract-specific programming language are compiled into ‘bytecode’, which a feature called the ‘Ethereum virtual machine’ (EVM) can read and execute.

EVM is a simple but Herculean Turning complete 256bit virtual machine embedded in the ethereum protocol and plays a crucial role in the consensus engine of the interim system, this allows any anonymous persons to execute arbitrary code in a trustless environment. It’s also a runtime environment for smart contracts which is sandboxed and completely isolated meaning that the code running inside the EVM has no access to the network file system.

In the process of the transaction, all the nodes contained in the network, execute this contract using their EVMs, on the nodes is stored in the most recent state of each smart contract.

The ERC-20 an enforcement measure as a technical standard used on the Etherum blockchain for tokens is a basic for Ethereum, commands and vital importance, it defines a common list of rules that all Ethereum tokens must adhere to. Consequently, this particular token empowers developers of all types to accurately predict how new tokens will function within the larger Ethereum system. This simplifies and eases developers’ tasks because they can proceed with their work, knowing that each and every new project won’t need to be redone ever.

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