What are Smart Contracts in Blockchain? - Explained with Examples

Nick Szabo, a cryptographer and a legal scholar, realised the need for a decentralised ledger for Smart Contracts in 1994. He conceptualised that the contracts can be written directly within the codes, which can then be stored and reproduced on the system and supervised by a network of computers. This network is also known as Blockchain. The Smart Contracts market is expected to reach a valuation of £294 million by 2026. These figures show the popularity and growing demand for Smart Contracts.   

Simply put, smart contracts are blockchain-stored programmes that execute when certain criteria are met. While the contracts are written by hand, Smart Contracts are embedded in lines of code on a Blockchain. They exist on Blockchain networks, and the parties to the agreement perform specific actions to get the desired outcome. Sometimes, these actions are supposed to be carried out in time for the contract to be completed.

Having understood what Smart Contracts are, let’s explore different aspects of Smart Contracts and how they work in a Blockchain. 

Table of Contents

1) What are Smart Contracts in Blockchain? 

2) How do Smart Contracts Work? 

3) 5 Examples of Smart Contracts in Blockchain

4) Benefits of Smart Contracts 

5) Use Cases and Applications of Smart Contracts 

6) Limitations of Smart Contracts 

7) Conclusion 

What are Smart Contracts in Blockchain?

Smart Contracts follow the ‘if/when, then’ statements written directly in code on a Blockchain. Smart Contracts entail the execution of specified commands and actions when certain conditions are met and verified. These actions can be related to anything, including releasing funds to appropriate parties, sending notifications, registering a vehicle, and many more.   

Smart Contracts are simple programs stored on the Blockchain network that become operational only when predetermined conditions are met. Typically, they are used to automate the way agreements are executed. These ensure that the terms and conditions agreed upon by the parties is fulfilled.

In addition, the Smart Contracts also eliminate the requirement of any third party to interfere in the agreement. This way, terms of agreement can be kept transparent between the parties.

Smart Contracts are self-executing programs that automatically perform the actions stated in the contract or agreement between parties. Once the conditions of the contract are achieved, the transactions made between the parties are irreversible but trackable. No central authority, legal system, or external enforcement bodies can interfere because such contracts are self-executing and rigid.
 

How do Smart Contracts work? 

Working with Smart Contracts in a Blockchain is very simple. The following points explains how the Smart Contracts work in a Blockchain network.

a) The Smart Contracts contain information and permissions written in the code that needs a specific sequence of events to happen to activate the terms and conditions cited in it.

b) Smart Contracts have a feature of time constraints which introduces deadlines in the contract.

c) In the Blockchain every Smart Contract has its address and can be linked by using its address assuming that it has been broadcasted on the network.

Using Smart Contracts is very easy. Let’s take an example of a simple logic of IF-THEN:

a) IF you had sent an object “X”, THEN you’ll receive a predetermined amount of money in Cryptocurrency.

b) IF you had sent valuable virtual assets (Cryptocurrency), THEN you’ll receive the object “X”.

c) IF you do the job, THEN you will receive the virtual assets (Cryptocurrency).

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5 Examples of Smart Contracts in Blockchain
 

Following are a few examples of Smart Contracts in Blockchain.

1) Improve the Customer Experience

Smart Contracts can enhance business-to-customer relationships effectively. For example, a fitness clothing brand partnering with online music streaming app, where the person works out while listening to the music. The person will be receiving offers for new clothes and subscriptions to music.

2) Entertainment Consumption

In the entertainment sector, the Blockchain can enhance the consumer connection with the chosen sections. For example, Non-Fungible Tokens (NFTs) validate virtual assets possession. The buying, selling or transferring of the NFTs (non-fungible tokens) can be integrated by Smart Contract.

3) Healthcare Communication

Proper communication is required among the patients and insurers. While storing data of the patients on the Blockchain, will reduce the paper works and will be able to send data directly to the providers. For example, If the patient requires medical interventions, requests through Smart Contracts will check the insurance coverage and release payment instantly.

4) Supply Chain Management

Enterprising Blockchain in supply chain management will enhance the functions in certain areas. The goods and materials could be easily tracked by the Smart Contract. For example, while going through the international supply chain and calculating the taxes of the products, most of the Blockchain software will able to track the product’s origin. However, certain companies or organisations delve into Smart Contracts on Blockchain as it has the ability to reduce flaws and enhance efficiency.

5) Human Resource Management

With the distributed ledger technology, human resource manager’s functions can be automated. For example, while onboarding new employees to the organisation the Smart Contract can easily authenticate the details of the employees and impose duties and responsibilities.

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Benefits of Smart Contracts in Blockchain 

The benefits of Crypto contracts are listed as follows:

a) Reliable: These contracts are executed as soon as the pre-determined conditions are met. This means that the outcomes are immediate. Moreover, as the contracts are digital and automated, no paperwork is required. It helps save time that could have been spent correcting errors while documenting them by hand. 

b) Reduced chances of manipulation: Smart Contracts assure the persistence of the data and reduce the possibility of manipulation. Thus, the candidates will receive exact details at the same time.

c) Environment Friendly: A key advantage of such Blockchain-based contracts is that they eliminate the need to use papers in offices, notaries, and other such places. This way, attempts can be made to make the world safer and more sustainable.

d) Safe and Secure: This is another aspect that makes the Crypto contracts useful. Since they are stored on the Blockchain, they are secure, and no one can tamper with or alter them. All transactions carried out on the Blockchain are recorded and encrypted. This makes them highly secure and safe.

Use Cases and Applications of Smart Contracts 
 

To better understand Crypto contracts, let’s look at some use cases and applications in the real world.   

Supply Chain Management

Using Blockchain technology, self-enforcing contracts can be developed. These will function without the need for any outside intervention. A Crypto contract can be created for an end-to-end supply chain that would not require daily management or auditing. This will make managing the supply chain a lot simpler and more effective.   

Music Industry 

The music industry is another sector where Blockchain-based contracts can play a vital role. With such contracts, copyright issues can be resolved to a great extent. Through Blockchain-based systems, making royalty payments becomes a lot easier and simpler. The contracts can state how much royalty income is for the label and the artist. Such payments can happen instantly with the help of Blockchain technology. For instance, when the music is used for commercial purposes, revenue is divided between the artists and the music label. This division is done on a pre-determined basis and is fed into the Smart Contracts. When a certain amount of revenue is generated, or a specific time has passed since the release of the music, then the money will get divided among the parties.   

Retail 

Blockchain-based contracts can help streamline the administrative processes in the retail sector. These will be most useful for brick-and-mortar retailers as they can use contracts to enable faster and safer payments.  

Recording the Financial Data 

These contracts can facilitate the accurate and transparent collection of data. In relation to financial data, such contracts can be valuable as they can drastically reduce auditing and compliance costs. Several financial rules can be executed through such contracts on the Blockchain without any intervention.   

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Limitations of Smart Contracts

Blockchain contracts have certain limitations that make it challenging for the parties involved. The limitations are as follows: 

1) One of the fundamental limitations is that these do not eliminate the involvement of third parties. These will be involved with the Blockchain contracts in some or the other capacity. For instance, lawyers will not be required to prepare individual contracts. But they will become associated in such contracts as developers will consult them to understand the contract's terms better to create better and more effective codes.   

2) Another major limitation of such Blockchain-based contracts is that they cannot handle terms and conditions, which need to be more specific and clearer. But it is only sometimes possible that all the terms and conditions are clear to all the parties. As a result, many times, Blockchain contracts are not highly effective and useful.

Conclusion

With this blog, we hope you understand what Smart Contracts in Blockchain are and how they work. They potentially have a very bright future; although there is still much room for betterment, it can be a big part of how people form contracts and agreements. As Blockchain becomes increasingly popular, the popularity and relevance of Smart Contracts will also increase. In the future Smart Contracts will become familiar and be used on different Blockchain platforms to create agreements between parties.

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