What Are Smart Contracts on the Blockchain?

Tanya Sharma
Tanya Sharma

Updated on January 16, 2023 07:45 AM

Published on December 26, 2022 05:34 PM

A smart contract, like any other contract, lays forth the conditions of an arrangement. However, unlike a typical contract, the conditions of a smart contract are performed as code running on a blockchain such as Ethereum.

What Are Smart Contracts on the Blockchain?
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Smart contracts, like any other contract, spell forth the parameters of an agreement or deal. What distinguishes smart contracts is that the terms are established and implemented as code running on a Blockchain, rather than on paper on a lawyer's desk.

Smart contracts build on the fundamental concept of Bitcoin — sending and receiving money without a "trusted intermediary" like a bank in the middle — to enable the security automation and decentralization of practically any type of deal or transaction, no matter how complex. They also provide security, dependability, and borderless accessibility because they function on a blockchain like Ethereum.

What Is a Smart Contract?

A smart contract is a self-executing contract in which the conditions of the buyer-seller agreement are directly encoded into lines of code. The code and the agreements contained within it are spread across a decentralized blockchain network. Transactions are trackable and irreversible, and the code controls the execution.

Smart contracts allow for trustworthy transactions and agreements to be carried out between disparate, anonymous participants without the requirement for a centralized authority, legal system, or external enforcement mechanism.

While blockchain technology has come to be known primarily as the foundation for bitcoin, it has progressed far beyond that role.

Also Read: A Brief History of Blockchain

How do smart contracts work?

Smart contracts were first proposed in the 1990s by Nick Szabo, a computer scientist, and lawyer. Famously, Szabo compared a smart contract to a vending machine. Consider a machine that sells soda cans for a quarter.

If you insert a dollar and choose a Coke, the machine is programmed to either provide your drink and 75 cents in change or (if your pick is sold out) to ask you to make another option or return your $1.

This is an example of a straightforward smart contract. Smart contracts, like a Coke machine, can automate nearly any type of exchange without the need for a human middleman.

While Ethereum is currently the most popular smart contract platform, it can also be run on several other cryptocurrency blockchains (including EOS, Neo, Tezos, Tron, Polkadot, and Algorand). 

Anyone can design and deploy a smart contract to a blockchain. Because its code is transparent and publicly verifiable, any interested party can see exactly what logic a smart contract follows when it receives digital assets.

  • A variety of programming languages are used to create smart contracts (including Solidity, Web Assembly, and Michelson). Each smart contract's code is kept on the Ethereum network's blockchain, allowing any interested participant to inspect the contract's code and current state to verify its operation.

  • Along with the blockchain and transaction data, each computer on the network (or "node") holds a copy of all existing smart contracts and their current state.

  • When a smart contract gets cash from a user, all nodes in the network execute its code to reach an agreement on the conclusion and the resulting flow of value. This is what enables smart contracts to operate securely in the absence of a central authority, even when users conduct complicated financial transactions with unknown entities.

  • To execute a smart contract on the Ethereum network, you must often pay a price known as "gas" (so named because these fees keep the blockchain running).

  • Smart contracts, once put on a blockchain, are largely unchangeable, even by their originator. (This rule is not without exceptions.) This makes it more difficult for them to be restricted or shut down.

Advantages of smart contracts

Speed, efficiency, and precision

When a condition is met, the contract is immediately executed. Because smart contracts are digital and automated, there is no paperwork to process and no time spent reconciling errors that frequently occur when filling out forms manually.

Transparency and trust

There is no need to question whether information has been manipulated for personal gain because there is no third party involved and encrypted records of transactions are transmitted between participants.


Blockchain transaction records are encrypted, making them extremely difficult to hack. Furthermore, because each record on a distributed ledger is linked to the preceding and subsequent entries, hackers would have to change the entire chain to change a single record.


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

Smart Contracts in Blockchain FAQs

What is a smart contract in the context of blockchain?

A smart contract is a program that runs independently and is based on if-then logic. Vending machines, for example, are a common sight in everyday life. It's also a simple smart contract model: If a user inserts $2 and then presses B4, the machine will dispense the package of cookies stored in the B4 slot.

Why is a smart contract required for a blockchain?

A smart contract's objective on a blockchain is to simplify business and trade between anonymous and identified participants, sometimes without the need for a middleman. A smart contract reduces the formality and costs associated with traditional techniques while maintaining authenticity and legitimacy.

What are the four main components of a smart contract?

When planning a smart contract deployment, there are several concerns and challenges to consider-

  • Security.

  • Integrity.

  • Alignment.

  • Management.

What blockchains support smart contracts?

Ethereum is a decentralized platform that enables the execution of smart contracts. In contrast to Bitcoin's Turing complete script system, Ethereum has developed Turing complete languages such as Serpent, Solidity, Low-level Lisp-like Language (LLL), and Mutan to support the applications of non-cryptocurrency users.

Is an NFT considered a smart contract?

NFTs are created using smart contracts that assign and reassign ownership when they are transferred or resold. At its most basic, smart contracts serve as a means for carrying out a sale agreement.

What is the distinction between a token and a smart contract?

A token contract is nothing more than an Ethereum smart contract. "Sending tokens" truly implies "calling a method on a smart contract that someone authored and deployed". In the end, a token contract is nothing more than a mapping of addresses to balances with certain means for adding and subtracting from those balances.


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