What Are Smart Contracts? A Beginner's Guide to Smart Contracts

What Are Smart Contracts? A Beginner's Guide to Smart Contracts

Today, smart contracts are substituting the traditional paper contracts in many industries. What are the smart contracts? Why are they unique and what makes them attractive to businesses? Let’s discover.

What is a smart contract?

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Smart contracts are digital protocols aimed at making the performance of the traditional contract better and of higher quality. In other words, these innovative contracts are software located on blockchain, created for enabling negotiations before making a deal – contracts contain terms of agreement and become fulfilled automatically.

How do they work?

Every smart contract has its own address written in blockchain – it is unique and helps to find the document in the network. Contracts do not limit parties making agreements – they can be as complex as it is required.

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First self-executing contracts were created on the BTC blockchain and were supported by it. with time, however, ETH has started to provide more possibilities – developers could create their own contracts by their own templates – so, corporations have started to utilize ETH for the purpose.

The most important element of executing such a contract is to make sure all conditions are met, and all rules are respected. Only in this case, the contract will work. Otherwise, it is not possible to make the contract be fulfilled.

Unique feature 

Usually, in the centralized businesses, third parties, such as banks, government, lawyers or various financial institutions, are involved into the transaction-making processes. It may be a problem as businessmen and entrepreneurs are often dependent on these mediators, which do not give any guarantees of the successful performance.

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Self-executing contracts, in their turn, present a different possibility to users – they eliminate these middle parties. As these contracts are fulfilled automatically, intermediaries are simply not needed anymore, and therefore, smart contracts guarantee more protected and private business management.

What are other advantages?

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The most important benefit that self-executing contracts bring to companies is the decentralization. The innovative type of contracts is distributed meaning that documents are not stored in one computer and are not controlled just by one certain group of people. The implied positive sides of decentralization are:

• Safety

Parties making a smart contract can be sure that there is no attack, fraud and stealing possible. Attempts of making criminal activities in this case are eliminated as they are noticed and become invalid. Moreover, these contracts cannot be changed after they are signed.

• Direct transactions

As it is noted above, third parties are not needed while conducting business with self-executing contracts, therefore, all transactions are direct, transparent and can be checked.

• Establishing trust

Self-executing contracts bring one more important benefit which improves every business – trust. For successful operations in any business sphere trust is necessary, and smart contracts help to establish it, as all partakers know that the rules will not be broken.

• Recording information

With DLT, all the data is duplicated and kept in the ledger – it cannot be lost as in the case with paper documents.

• Reduced costs

Working with intermediary parties does not only make businesses dependent on them, but also increase costs. In the case with the innovative contracts, however, it is different – additional fees are eliminated, so the cost gets significantly reduced.

• Fast processes

Automatic contracts increase the speed of transactions as well – parties do not deal with paper documents and complex verification anymore. Payment are instantly made and verifies, so, all the processes speed up.

Where these contracts are used? 

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Many spheres and businesses have already turned to smart contracts to increase the quality of their operations. Among them:

• Banking

Financial sphere is the first one to utilize self-executing contracts with the aim of altering the standard transactions-making model. 

Today, banks are utilizing new contracts in order to comply with AML and KYC – in these cases the verification and identification of clients is necessary. By doing so, banks make the process cheaper, faster and more efficient.

• Healthcare 

Digital contracts solve the problem with high costs in health management sphere – they make the costs lower by connecting doctors with clients directly.

The absence of paper documents play an important role here as well – processes become more convenient for all parties. For instance, when the patient gets any medical care, the information gets recorded in the ledger automatically. This way, clients know how much to pay for the received service, while doctors are sure that they will get the payment for their work.

• Supply chain and transportation

Transportation and delivery industry are improved a lot with the assistance of crypto contracts. 

Traditional shipping can be a long and expensive process. Moreover, goods may be lost without any refunds for customers. Crypto contracts, however, provide a solution by automatic confirmation of all activities involved in shipping. 

By tracking their goods, buyers can discover at what stage of the process their product is at the certain moment, check all the necessary information and be sure they will get what they have ordered.

Also, one of the most important documents involved into the shipping process – the bill of lading – is digitized with DLT.

• Real Estate

Renting apartments can be a very complicated process – turning to the real estate agencies, paying for their services and being unsure about the safety of operations. Crypto contracts provide a solution to this problem as well, and present benefits for all participating groups.

The landlords do not have to work with agencies for advertising, while those looking for apartments to rent do not have to ask agencies to connect them with potential flat providers. In this case, both parties save their time and money.

Digital contracts have revolutionized a number of industries by today. They have altered the way companies conduct their operations by establishing trust and direct cooperation of parties.


Smart contracts and their applications will be addressed at the Blockchain & Bitcoin Conference Stockholm. Details of the event and registration – on the official website of the event. 

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