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What is a Smart Contract and How Does it Work?: A Beginner’s Guide

What is a Smart Contract?

A smart contract is a self-executing contract that is made between a buyer and a seller. It is created with the terms of their agreement, written into lines of code. This, moreover, exists in a distributed decentralized blockchain network.

Notably, these smart contracts permit reliable transactions and agreements to be carried out in a decentralized blockchain network without requiring a central authority, legal system, or any external enforcement mechanism.

Moreover, an American scientist defined smart contracts as “computerized transaction protocols that execute terms of a contract.” More so, these contracts deployed on a blockchain network are traceable, transparent, and irreversible.

To put it simply, smart contracts are simply programs stored on the blockchain that run when predetermined conditions are somehow met. It is typically used to automate executions without the help of any intermediary. As it automates the workflow, it easily triggers the next action as long as conditions are met.

How do Smart Contracts Work?

In case you didn’t know, smart contracts were first proposed by Nick Szabo in 1994. He is also the computer scientist who invented Bit Gold in 1998. This happened 10 years before the invention of Bitcoin back in 2009.

To put it simply, they follow the “if/when… then…” mechanism of those that are written into code on a blockchain network. If or when the predetermined conditions are met and verified, then, the network of computers will execute the said actions.

Within a smart contract, moreover, there can be as many preconditions needed to satisfy the participants before the completion of the tasks. Terms and conditions are first established, and participants determine how the transactions or data will be represented on the blockchain, agree on the “if/when… then…” condition, explore all the possible exceptions, and define a framework that will work best to solve disputes.

Furthermore, while a smart contract can be programmed by developers, organizations that use blockchain technology can also provide tools to simplify structuring these contracts.

Benefits of Smart Contracts

Efficiency and Accuracy

Once the predetermined conditions are met, the smart contract is executed immediately. Since these are digital and automated, no paperwork is required to spend in filling documents or reconciling errors.

Transparency and Trust

Blockchain transactions and records are encrypted and shared across participants. With this, they can rest assured that these data can’t be altered and edited.


Since the data are encrypted, this makes the records almost impossible to hack. And since blocks in the blockchain are interconnected, this will still give hackers a hard time altering records as they need to alter the entire change just for one single record.

Some Applications of Smart Contracts

Here are some of the applications of smart contracts today:

  1. Pharmaceutical Sector
  2. Retail-supplier Relationships
  3. International Trading
  4. Healthcare Sector
  5. Financial Services
  6. Government Voting System


Along with blockchain technology, smart contracts have already become a crucial and integral tool to a futuristic decentralized web.

Today, several industries are already using it and have been benefitting from its endless potential.