Blockchain technology has found its immense implementation in the financial and corporate world. With the growing use of Blockchain, smart contracts have also found their way into our lives.

If you follow Blockchain you surely might have come across smart contracts. There are numerous crypto projects which are introducing smart contracts feature in their blockchain network. Ethereum is the biggest blockchain to support smart contracts. It was specifically designed to support smart contracts.

But what is a smart contract? How does it work? Is it secure?

These are some of the common questions that few people face. Here is all that you need to know about smart contracts.


Smart contracts are digital contracts that are stored on the blockchain network. It is a self-executing contract between the buyer and the seller. These digital contracts automatically execute the agreement as per the terms and conditions mentioned on the contract.

The word smart contract was first coined by Nick Szabo. He is an American cryptographic and computer scientist who defined smart contracts as “computerized transaction protocols that execute terms of a contract.”

Being stored on the blockchain network, the smart contracts are immutable, decentralized and distributed.

Smart contracts are very similar to real life contracts between two people or between institutions. The only difference is that smart contracts are written in codes. 

With the help of smart contracts, you can carry out transactions without a third party or central governance. 

Take an example where investors are investing money on a project through a third party. The investors are promised returns when the project meets its goal. Now both the project team and the investors need to trust the third party to handle their money correctly.

The investors would either want the returns on the successful completion of the project. In case the project fails to meet its goal investors will expect a refund. Similarly, the project team will expect that the fund reaches them.

So in a way both are dependent on the third party.

However, in the case of smart contracts, there is no need for a third party. No single person or an institution is in control of the money.

In the above scenario if the deal is done using smart contracts then the funds are automatically released on completion of the goal. If the project team fails to meet the goal the investors will automatically receive the refund.


A smart contract is a form of programme that encrypts business logic and operates on a dedicated virtual machine embedded in a blockchain or other distributed ledger.

Business teams engage with developers to establish their requirements for the smart contract’s desired behaviour in response to various events or circumstances, which is the first step in the process of creating a smart contract. 

The developers then create the logic and test it on a smart contract writing platform to check that it works as expected. After the application is written, it is passed on to a security review team. An internal expert or a company that specialises in vetting smart contract security could be used. The contract is then deployed on an existing blockchain or other distributed ledger infrastructure once it has been authorised.

The smart contract is configured to listen for event updates from an “oracle,” which is effectively a cryptographically secured streaming data source, once it has been deployed. Once it obtains the necessary combination of events from one or more oracles, the smart contract executes.

Are smart contracts secure?

Being stored on the Blockchain network, smart contracts are immutable and distributed. 

Immutable means that no one can tamper with the code of your contract behind you. Once a smart contract is made it can never be changed again.

While distributed means that the output of the contract is validated by all the people on the network. 

If someone hacks or tries to alter the codes somehow, the other people on the network will validate against it and the hacker will fail. So a single person cannot force the release of the funds. This is because the other people on the network will spot this attempt and make it invalid.

Where are smart contracts used?

Smart contracts not only find their use in virtual currency and digital assets but also in banks, insurance companies etc. 

Banks can use smart contracts to issue loans and automatic instant payment services. The insurance companies can implement it to process claims. While the postal companies could use it for the payment on delivery and so on.

Smart contracts can be used to automate healthcare payments, reducing overbilling and preventing fraud. The music industry could utilise the blockchain to register ownership of songs and then use a smart contract to ensure royalties are paid when the music is used commercially. 

The automobile sector might profit from smart contracts and blockchain by storing conveniently accessible information about vehicle maintenance, accidents, and ownership history.