Smart contracts: what are they and how do they work?

Michele D'Angelo28 May, 2022

shaking hands over the blockchain

In the age of cryptocurrency and blockchain technology, an intriguing player has taken center stage: Smart contracts. They have been hailed as a revolutionary development that has the potential to overhaul conventional systems and dramatically transform how we do business.

However, despite the buzz around them, understanding what they are, how they work, and why they matter can be daunting. This comprehensive guide aims to demystify the realm of smart contracts and shed light on their far-reaching implications.

What are smart contracts?

Imagine a vending machine. You insert a coin, select a product, and the machine delivers it without any human intervention. Smart contracts operate on a similar premise, albeit in a more complex, digital landscape. In essence, smart contracts are self-executing digital contracts, with the terms of the agreement embedded in the code. When the pre-set conditions are fulfilled, the contract executes itself.

These digital agreements, born out of blockchain technology, first gained prominence with Ethereum. However, their potential extends far beyond the confines of any single platform or cryptocurrency transactions. From real estate and supply chains to healthcare and finance, smart contracts can reshape operations and create new paradigms of efficiency and transparency.

The Anatomy of Smart Contracts

A closer examination of smart contracts reveals three critical components: the involved parties, the agreement, and the contract’s subject. Just as traditional contracts, smart contracts lay out an agreement between two or more parties. But, instead of paperwork and legal jargon, these agreements are embedded in code within a decentralized blockchain network.

Blockchain, the underpinning infrastructure, lends its inherent features of immutability and transparency to smart contracts. Every action is recorded on a transparent ledger visible to all parties, fostering trust and accountability. In stark contrast to traditional contracts, smart contracts minimize dependency on intermediaries, speeding up transactions while also boosting security and reliability.

How do smart contracts work?

They are created using a programming language and implemented on the blockchain. They can be used to automate many different types of transactions, including financial contracts, voting systems and property. When someone wants to create a smart contract, they must first find a blockchain platform that supports the type of contract they want to create. Once they find a compatible blockchain, they can use the programming language of that blockchain to write their contract.

Blockchain platforms

There are many different platforms for smart contracts, but some of the most popular are Ethereum, EOS, Cardano, Tezos, Solana, Polkadot and others. Each platform has unique features and advantages, so it is important to do some research before choosing one.

Blockchain platform for smart contracts - ethereum Ethereum

Ethereum is a decentralised platform on which smart contracts are executed. It is powered by the ETH token, which is used to pay transaction fees. Ethereum also offers a number of other functionalities, such as decentralised apps (dApps) and smart properties.

Blockchain platform for smart contracts - EOS EOS

EOS is another decentralised smart contract platform. It uses the Delegated Proof of Stake (DPoS) consensus algorithm to reduce transaction times compared to other platforms. EOS also offers a number of features that make it unique, such as smart accounts and smart contracts.

Blockchain platform for smart contracts - Cardano Cardano

Cardano is a smart contract platform still under development. It is based on a new programming language called Haskell, designed to be more secure than existing languages. Cardano also plans to offer features such as sidechains and smart contracts.

smart contracts platform - Tezos Tezos

Tezos is a decentralised smart contract platform that uses a proof-of-stake (PoS) consensus algorithm. Tezos also offers functions such as formal verification, which allows developers to mathematically prove the correctness of their smart contracts.

smart contracts platform - Solana Solana

Solana is a smart contract platform that uses a proof-of-stake (PoS) consensus algorithm. Solana also offers smart contract functions and decentralised applications (dApps).

smart contracts polkadot Polkadot

Polkadot is a platform built on a new programming language called WebAssembly, designed to be more secure than existing languages. Polkadot also offers smart contract functions and decentralised applications (dApps).

Which platform is best for your project?

The best platform for you will depend on your needs and preferences. If he wants an easy-to-use platform, Ethereum may be a good choice. If he is looking for a platform with fast transaction times, EOS might be a better option. And if he needs a platform with advanced features such as formal verification, Tezos might be the right choice for you.

Types of smart contracts

online handshake - the symbolism of a smart contract
Fonte: pngtree

There are several types of contracts, but some of the most popular are:

Financial contracts: These smart contracts can be used to automate financial transactions such as loans and investments. They can be used to create secure and transparent voting systems.

Ownership: ownership can be tracked and transferred using smart contracts.


So why smart contracts are gaining traction across industries?

Well, because their automated nature eliminates the need for intermediaries, significantly cutting down costs and enhancing speed. By leveraging the blockchain’s transparency, smart contracts ensure all parties have access to the same information, building trust. Plus, their security is unrivaled, thanks to the tamper-proof nature of the blockchain.

Cost reduction: they can save companies time and money by eliminating the need for external intermediaries.

Better security: they are digital and decentralised, which makes them more secure than traditional paper contracts.

Faster transactions: they can automate transactions, making them faster and more efficient.


The advantages are many, but there are also some disadvantages to consider:

Limited programming languages: not all programming languages are compatible with smart contracts. This can make it difficult to find a blockchain that supports the language you want to use.

Complexity: smart contracts can be complicated to set up and may require the help of a professional programmer.

Lack of regulation: Because they are still new, they are not yet regulated by governments or other legal bodies. This may change in the future, but for now keep in mind that there is no legal protection if something goes wrong.

Because smart contracts are implemented on the blockchain, they are tamper-proof and no one can change them once they are created. This makes them much more secure than traditional contracts, which can be easily altered or forged. Another advantage of smart contracts is that they can save companies time and money by eliminating the need for third-party intermediaries.

This is because smart contracts are self-executing, which means they do not require anyone else to monitor or control them. Finally, smart contracts can increase the efficiency of transactions by automating tasks that would otherwise have to be performed manually. For example, if a contract states that a certain amount of money will be paid to someone when certain conditions are met, a smart contract will automatically release the funds when those conditions are met. This eliminates the need for manual processing, which is often time-consuming, error-prone or expensive.

What are the associated challenges?

There are many advantages to using smart contracts, but they also come with some challenges. One challenge is that they are often complex and can be difficult to understand. This is because they are written in code that is not always easy to read and interpret. As a result, it can be difficult to understand what a smart contract will do before it is executed.

Another challenge is that they rely on the blockchain network in which they are executed. If there are problems with the blockchain network, this could potentially cause execution issues. Furthermore, smart contracts are still a new and evolving technology. This means there is a lack of standardisation and regulation in this area. This may change in the future, but for now it is worth bearing in mind.

The future of smart contracts and the problems they can solve

Despite the challenges, smart contracts have enormous potential and could revolutionise the way companies operate. One area where they could be particularly useful is supply chain management. Smart contracts could be used to track the flow of goods and ensure timely delivery.

This would reduce the need for manual tracking and help increase efficiency. Another area where smart contracts could be useful is in financial services. They could be used to automate payments, settlements and other financial transactions.

This would reduce the need for manual processing and help speed up transactions. Smart contracts could also be used to create digital identities. This would allow people to control their own data and decide who can access it. This could have a significant impact on privacy and security. Although smart contracts still face some challenges, they have the potential to revolutionise the way companies operate. So keep your eyes open for them in the future!

Author: Michele D'Angelo

Michele è sempre stato appassionato di tecnologia, in particolare del lato tecnico delle cose. Quando si tratta di tecnologia blockchain, ama approfondire gli aspetti di bitcoin, blockchain e criptovalute in generale. È un introverso che ama passare il tempo da solo a ricercare e scrivere su questi argomenti.

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