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Smart Contract
Smart Contract

The Complete Beginner’s Guide to Smart Contracts 

When it comes to running successful blockchain platforms, the role of a smart contract is significant. Yes, it can be difficult to understand it technically; let’s try it with an example. 

Imagine a person is trying to purchase with a vending machine. They put in the coin and then press the button for the item needed. Subsequently, the machine pushes out the required item from the lever. The catch here is that there is no intermediary, and the process was executed seamlessly. 

Similar is the case with smart contracts. This blog will take a deep dive into how smart contracts work, their applications, benefits, and how they came into existence. 

What are Smart Contracts?

Popularized by the Ethereum blockchain, smart contracts have the capacity to execute actions if a certain set of conditions is fulfilled. 

Since all instructions are written in code, enterprises need developers with extensive expertise to develop smart contracts.  No entity is responsible for maintaining smart contracts.

How Did Smart Contracts Come into Existence?

Nick Szabo, an American programmer came up with the idea of smart contracts in 1996. This was much before blockchain came into existence. 

With the advent of Bitcoin, talks around smart contracts began to surface. Finally, half a decade later, Ethereum made the use of smart contracts possible. While there are plenty of platforms now that provide smart contracts, nothing can beat the Ethereum experience!

Now that you have some idea about a smart contract let’s know more about its functioning and working. 

Types of Smart Contracts 

Here are the types of smart contracts used by organizations. 

1. Smart Legal Contract

These contracts involve the management of legal requirements and fulfilling an agreement with mutual understanding. The failure to do so can result in legal action against the defaulter and automatically triggered by the smart contract. 

2. Decentralized Autonomous Organizations 

When people make communities on a blockchain, DAOs are formed. These communities have to follow a set of rules which are then coded in smart contracts. The community’s rules govern every participant and their actions, and each one of them plays a part in enforcing these rules. 

3. Application Logic Contracts 

Application Logic Contracts help you communicate across different devices. For example, the merging of the Internet of Things (IoT) with blockchain. 

Working of Smart Contracts

Both parties first lay down the terms of the smart contract. Once this is done, these instructions are coded on the blockchain. 

After that, the created code is stored and replicated among all the blockchain network participants. Now, only if all the participants give their consensus, the contract terms are fulfilled. If the conditions are not satisfied, the party at fault has to pay the penalty. 

Not only does this process cut down on manual labor, but it also automates the entire process without errors. 

Key Applications of Smart Contracts

Here is how various industries are using smart contracts to their advantage. 

1. Healthcare and Medication

Smart contracts play a major role in the healthcare and medication sector. For example, the health records of patients are confidential and need to be stored with utmost security. However, with blockchain, only certain authorized personnel to access the data. Fortunately, smart contracts can help them carry out research confidentially.

Other benefits can be seen in: 

  • Storing receipts of patients on the blockchain network
  • Use the distributed ledger to streamline supplies, manage drugs, manage supplies, and keep a check on compliance
  • Register blood pressure and heart rate details via a health-tracking band and receive notifications if a parameter crosses the line.  

2. Banking Services

Keeping a record of all the finances can be simplified greatly with smart contracts. Not only will you eliminate the cases of data infiltration, but your stakeholders will also be able to participate in decision-making using smart contracts.

3. Financial Services

With simplified trade clearing, banks will be able to do calculations faster and directly transfer all funds into the person’s account. Besides, there is no need to wait for receiving payments as smart contracts aid instant money transfers. 

Furthermore, smart contracts make it very easy to maintain all the tax records and leave no scope for fraud. Also, smart contracts will help you automate tax payments and avoid late fees. 

4. Supply Chain and Inventory Management

With blockchain and smart contracts, enterprises get access to a digital supply chain. In addition, smart contracts can help manage the inventory automating payments and tasks.

Also, managers will be able to keep a real-time inventory check, analyze the time spent to shift products in big warehouses via smart contracts. Moreover, delivery times can be improved and made much more efficient. 

If a supply chain operates across multiple locations, smart contracts will help you settle payments and set up a recurring billing cycle automatically. This data can thus be used to figure out the busiest times of a particular warehouse and improve facilities in that area. 

5. Digital Identity and KYC

To score well and pass the identity verification, you need to have a whole range of documents and other details. Now, this can become extremely time-consuming. First, you will need to collect hard copies of various documents and store everything in a single file. Smart contracts help you collect all data and store it safely. 

With this, KYC verification is done in just a few clicks. Furthermore, you achieve 100% privacy and can disclose only what you wish to disclose. 

Benefits of Smart Contracts

There are not one but multiple benefits of using smart contracts. These include: 

1. Reduced Costs 

Smart contracts eliminate the need for intermediaries from the entire process. Not only will this reduce costs, but it will also accelerate transactions. 

2. Enhanced Security

With smart contracts, all processes are executed securely and in an organized manner. In addition, the data stored in smart contracts is tamper-proof and it is not possible to tamper it. Thus, it is the safest bet for all organizations. 

3. Transparency and Reliability 

All the encrypted records are shared with the blockchain participants in smart contracts. Since everything is transparent, there is no issue of trust and reliability. Also, no one can tamper with the data available in the records. 

5. Advanced Storage 

Smart contracts are extremely helpful when it comes to storing vital information. In the case of data loss or theft, you can easily recover all details as they cannot be deleted from the blockchain network.

6. Guaranteed Outcomes 

Smart contracts follow rules and this is probably the best thing about them. Only if any of the given conditions is met, then only is the transaction executed. Thus, there are no chances of fraud. 

7. Crystal-Clear Communication

Parties involved in a deal handled by smart contracts, need to mention each and every detail. Thus, the process leaves no chance of miscommunication or misplaced detail. This leads to maximum efficiency, and the transactions are conducted at lightning-fast speed. 

The Future of Smart Contracts 

Be it finance, real estate, supply chain, telecom or manufacturing, smart contracts have the potential to bring a radical transformation to each one of them. Not only will they expedite the processes, but they will also facilitate complete transactional transparency. 

The end goal of a smart contract is to simplify business and operations between anonymous parties. By cutting down lengthy processes and costs associated with traditional methods, smart contracts will emerge as the backbone of the economy. 

Smart Contracts and DeFi

The right blend of smart contracts and DeFi will lead to solving more complex functions and eliminate the need for human intervention. With time the need for smart contracts in the FinTech space is becoming more profound. Not only will it lead to improved accuracy but it will also lead to higher standards of verification worldwide. 

The issue of trust in conditional transactions can easily be solved with smart contracts. Besides, payment processing, regulatory technology, and trade finance will grow leaps and bounds with smart contracts. 

With giants like PayPal already leveraging the power of cryptos, digital finance is all set to transform into something revolutionary. Thus, investing in smart contracts will be an intelligent decision as the new generation of finance comes into being. 

PayPal also plans to launch a crypto-based platform known as ‘Super App’. For the same, they are testing smart contracts to make payments and transaction experience smoother. 

A well-known platform, Robinhood is providing diversified investment opportunities to investors, which earlier seemed inaccessible. Following the same suite, retail investors are showing interest in platforms that provide more or less the same features. 

Another example in line is the Nasdaq-listed Freedom Holding Corp. (FRHC). It has boosted the morale of retail investors and urged them to purchase stocks and even participate in selected IPOs. 

The time is not far when fintech and other industries will be heavily dependent on smart contracts.

Wrapping Up 

While multiple blockchain platforms use smart contracts, 0defect is one of the most secure and advanced smart contract audit platforms

Be it an interim audit, basic security audit, full security audit, or round-the-clock audit, 0defect does it all and much more! Besides, you get access to an expert team of auditors, checks for 150+ vulnerabilities, and a comprehensive audit report. An audit service will also help you secure assets worth millions before the code is deployed on the main net. 

So, take that plunge in the crypto blockchain sphere with 0defect’s “Smart” services! 


1. Are there any drawbacks to using smart contracts?

The two major drawbacks to using smart contracts are no regulation for enforcement of smart contracts and issues with transaction processing speed and scalability. Besides, it is heavily dependent on programmers, exposing it to bugs and vulnerabilities. 

2. What all problems can smart contracts solve?

Smart contracts are used to streamline supply chain processes, eliminate product distribution fraud, process property transactions, reduce intermediaries, and ultimately reduce costs and time spent on processes. 

3. Can smart contracts help you track changes?

Smart contracts can support complex agreements between parties. With blockchain, you can easily track and audit data. Here each block acts like a digital fingerprint that changes over time. 

Comments (2)

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    […] Smart contracts have caused a reduction in malicious parties. But a smart contract audit goes one step further to ensure a sense of trust. Want to know more about smart contracts? […]

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