What to Know About Smart Contracts

In many situations where a person may try and sell a large asset, be it a car or house, for example, the process is usually incredibly tedious and complicated due to an excess amount of paperwork, contacting different companies and individuals and of course, the high number of associated risks. Smart contracts sometimes referred to as Digital contracts. are ready to change all of that.


Why are they Used?

Smart contracts are essentially designed and used to ensure that the conditions of any transactions are completed on either side. For example, when deciding to sell a house, many people will opt for a real estate agent to handle the many complications and steps it takes to actually sell the house, from mountains of paperwork, lists the house on the market and is a representing intermediary when negotiations regarding the price or anything else occur and will be present until the deal has been completed.

Additionally, an escrow service is available and vital to transactions like this due to a large amount of money involved and full trust is never quite achieved. At the end of every successful deal, both representative agents on the buying and selling side will collect around seven percent of the sale price as a commission which is still a hefty sum to pay up for the person selling their property.

This is where Smart contracts come into play and have essentially revolutionized the way contracts and deals are handled within the industry and at the same time, simplifying a well-known complicated process. As per Smart contracts, they tackle the trust situation by operating on an “If-Then” method. What this basically means is that, in the case of selling a house, the deed to the house and the deal will only be complete once the buyer has sent their funds to the system.

These services also provide escrow which means that ownership of the property and the buyer's money will both be securely held and then handed over to the rightful recipients at the same time once the deal is done and conditions are completed. Additionally, due to transparency, the deal is spectated and validated by hundreds of third-party observers to ensure that the deal goes through successfully. Essentially any service a real estate agent may provide will already be available through a simple, digital contract, saving both the buyer and seller heavy sums and forsaking any excruciating procedures.

In general, Smart contracts are able to conduct a transaction of any kind, be it money transfer, property sales and anything possessing value. In this manner, these contracts provide full transparency for buyers and sellers, removes any need for a third-party member, bypassing countless hectic procedures and severely cutting down on extra fees and completely forsaking the need for trust between clients due to how the contracts themselves work.

How do they work?

Smart contracts are simple in their method of operation. A client provides the set amount of digital coins, their escrow, property ownership, driver’s license and more into a digital contract. The contract then holds all these assets and will establish the terms of the contract and only release any assets to their rightful owner after establishing the terms and conditions and enforcing them as its method of operation.


Smart contracts can operate independently or be connected to several other digital contracts. Smart contracts can be designed and set up to connect several of them at a time. In this manner, completing all the predetermined conditions of a Smart contract will automatically open up the next one in line and continue on.

Theoretically, this means that entire companies could operate solely on Smart contracts and as of today, this is happening to some degree, especially among several cryptocurrency exchanges and other systems in which all the rules are already defined and due to this fact alone, an entire network or system could operation with full independence and autonomously.

Three Key Aspects

As it stands, Smart contracts consist of three vital factors, often referred to as objects. The first object is the involved parties in a contract, known as signatories coming together and complying with the terms and conditions of the contract and signing it digitally.

The second factor, or object, is the topic or subject of the contract itself. As is stands, the subject may only be available if it exists within contracts environment. Additionally, complete and unrestricted access to the subject or object must be provided to the contract at all times.


The third and final objects are the terms and conditions included in any contract. Using robust algorithms, these terms are fully noted in the contract by utilizing computer language suited for the specific contract and its environment. Included in these terms are of course the rules, rewards, and penalties related to the agreed upon terms and conditions.

The Surrounding Environment

In order for Smart contracts to be sustained and operate efficiently, the environment in which they function must be perfectly suited. To start off, the environment will be required to fully back public key cryptography which equips users with custom crypto-codes used to place their signatures on any smart contract which is exactly how most of the operational digital currency exchange platforms are currently using.

Additionally, Smart contracts require a transparent and decentralized environment and database in which complete transparency is provided to acquire the full trust of customers and are completely automated. Blockchain like Ethereum are perfectly suited for Smart contracts due to the decentralization it provides, a necessity for Smart contracts to operate as intended to.

The digital data source utilized by a contract must be completely trusted and reliable and includes the use of HTTPS, SSL and other secured protocols already being utilized around the globe and introduced into most of today’s software.

What they offer

With everything Smart contracts display, including their future potential, these digital agreements offer several benefits that many look forward to utilizing for business. Smart contracts provide complete autonomy, eliminating any need for a medium or a deal facilitator which proves both parties of a contract with full control.

All details and documentation involved in a deal are completely secured and saved on a public and shared ledger to ensure no manipulation or other scam-like acts during an agreement. This completely removes the trust factor due to the fairness in how Smart contracts operate.

Another big plus is the costs saved by using Smart contracts. Traditionally, real estate agents, consulters, legal aid and more are usually required when making a big deal. As per Smart contracts, this removes all the hassle and tediousness associated with agreements and effectively slash down on the insane prices and fees that come as part of an agent’s commission or work.

Smart contracts are also incredibly safe due to the difficulty in hacking them with proper design. Additionally, the environment in which they are stored is under heavy protection offering by intricate and advanced cryptography guaranteeing the safety of assets. The contracts are also incredibly efficient, saving time and money that would usually go to physically overlooking countless documents during a deal.

The creative mind

Digital contracts were first brought to light by a computer expert and cryptographer, Nick Szabo, in 1996. His efforts over many years into Smart contracts saw him rework the entire notion and publish several reports and papers and explained how establishing contractual business through a new innovative e-commerce protocol between complete stranger online. Despite the idea emerging in the 90’s, actually using them didn’t occur until 2009 when Bitcoin, the world’s leading and first cryptocurrency, including its blockchain, was released, introducing the perfect environment for these digital contracts to operate on.


More so, Szabo constructed the mechanics behind a decentralized cryptocurrency in 1998 called Bit Gold. Although never actually released or introduced, the coin possessed many of the current features that Bitcoin has, only 10 years earlier. As of now, digital contracts are heavily paired with digital currencies, additionally, it may be easy enough to admit that Smart contracts would not even exist without cryptocurrencies and vice versa.

How are they used?

As it's known by anyone involved in crypto-block tech and their industries, governments, regulators and financial institutes around the world have either completely shut out and banned cryptocurrencies or eagerly welcomed and adopted the technology, mainly blockchain and digital contracts as the underlying tech due to their revolutionary possibilities.

As an example, the DTCC and four of the top leading banks, including JPMorgan have successfully utilized blockchain as a means of trading credit. The chain was designed and developed by Axoni through the use of digital contracts. The contract possessed important data like trading details and risk assessment metrics, displaying an entirely new level of clarity and transparency for each involved member and financial regulators.

The phenomenon is global, with over 60 banks in Japan and South Korea already involved in testing the Ripple blockchain with the addition of contracts to facilitate international fund transfers between both countries and the system will see its release later this year. Due to the fact that digital contracts were created in relations to digital currencies, most of their use stems from the finance and banking industry.

However, Smart contracts can provide use to countless industries, including healthcare, insurance, real estate and more.

The other side

As of now, Smart contracts are still an incredibly infantile technology and even with providing a clear view towards its potential, contracts are still well exposed to many problems. First, a contract must be coded perfectly and be bug-free to operate as intended. This may often be a source of problems if the code is not correct and may leave the contract exposed to malicious users.

Additional issues consist of taxation methods, regulations by the government, complications of any deal underway and more. Despite all of this, the tech is still very young and will, in time, undoubtedly provide the potential everyone sees in these new-age digital contracts.

1 year ago

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