What is a Smart Contract in Cryptocurrency?

In the cryptocurrency space, we define a smart contract as an application or small program that runs on the blockchain

8 min readJun 21, 2022

Just like any contract, smart contracts lay out the terms of an agreement or deal. But what makes smart contracts “smart”? Because the terms are established and executed as code running on a blockchain, rather than on paper sitting on a lawyer’s desk. Smart contracts expand on the basic idea behind Bitcoin by sending and receiving money without a “trusted intermediary” or like a bank in the middle to make it possible to securely automate and decentralize virtually any kind of transaction, no matter how complex. And because they run on a blockchain like Ethereum, they offer security, reliability, and borderless accessibility.

Smart Contact is an important role in Cryptocurrency

Why is Smart Contract so important in Cryptocurrency?

Typically, they are a set of digital agreements with specific rules that can be enforced. These rules are predefined by computer source code, which is copied and executed by all network nodes.

In essence, blockchain smart contracts enable the creation of trustless agreements. This means that two parties executing a contract can make commitments through the blockchain without needing to know or trust each other. After the contract content is confirmed by both parties, if the trigger conditions are not met, the contract will not be executed. In addition to this, the use of smart contracts can significantly reduce operational costs by eliminating the need for intermediaries.

While the Bitcoin protocol has also supported smart contracts over the years, smart contracts gained popularity at the hands of Ethereum co-founder Vitalik Buterin. It is worth noting that each blockchain network may offer completely different smart contracts.

Nick Szabo, an American computer scientist, law scholar & cryptographer who invented the Smart Contract — *Nick Szabo*, an American computer scientist, law scholar & cryptographer who invented the Smart Contract

Who Create The Smart Contract?

Smart contracts were first proposed in 1994 by Nick Szabo, an American computer scientist, law scholar & cryptographer who invented a virtual currency called “Bit Gold” in 1998, long before the invention of bitcoin. In fact, Szabo is often rumored to be the real Satoshi Nakamoto, the anonymous inventor of bitcoin, which he has denied that.

Szabo defined smart contracts as computerized transaction protocols that execute the terms of a contract. He wanted to extend the functionality of electronic transaction methods, such as POS (point of sale), to the digital realm.

Ian Grigg and Gary Howland were the other contributors to the idea of smart contracts. They published their work about the Ricardian Contracts as a part of the Ricardo payment system in 1996.

Smart contracts refer to a computer algorithm designed to form, control, and provide information on the asset’s owner

How do smart contracts work?

Simply put for you, a smart contract is a deterministic plan. It performs specific tasks when certain conditions are met. Therefore, smart contract systems usually follow the conditional statement of “if…then…”. However, even if smart contracts become a mainstream technology, smart contracts are neither legal nor intelligent, they are just a piece of code that runs on a distributed system (blockchain).

Smart contracts refer to a computer algorithm designed to form, control, and provide information on the asset’s owner. It is indeed a program that runs on the Ethereum blockchain to facilitate, verify, or carry out credible transactions autonomously. To know how it works, first, we must understand what a smart contract consists of.

Signatures. The two or more parties must provide their consent to move forward with the proposed terms and conditions.
Critically identify the subject of the contract. The subject should be within the context of the smart contract environment.
Be specific with the terms. The terms need to be precise and described in detail. For example, Ethereum’s smart contract relies on Solidity programming language, so the agreement should be in specific mathematical terms compatible with the precise language.

The blockchain represents a distributed network of nodes, each one storing information about all transactions. To undo a transaction or to double-spend funds, one would have to gain control over more than 50% of all these nodes which can be called a 51% Attack on the cryptocurrency space.

Supposed a person wants to initiate a smart contract, they’ll need to download special software and generate a public key published in the system. Subsequently, an initiating message should be sent, and the nodes will pick it up. When the event established by the smart contract is fulfilled, the codes will execute.

For example, vending machines automatically give a buyer an ordered item if specific requirements are met (a definite amount of money is paid). A smart contract works the same.

When the event established by the smart contract is fulfilled, the codes will execute

Apart from transferring funds, there are several other use cases:

Digital identity: It removes counterfeits and provides individual identity to digital assets.
Financial security: They are perfect for liability management, automatic payments, or stock splits.
Trading activities: Smart contracts provide a great way to automate trading operations. Also, cross-border payments and international trades become more manageable with their help.
Clinical trial: It provides cross-institutional visibility, facilitates and automates data share, and strengthens confidentiality.
Government: Smart contracts can improve the transparency and efficiency of voting.

Smart contracts use cases are variable and cover numerous opportunities. Potentially, they can become a powerful tool in many fields of human activities.

Smart contracts also play an important role in the blockchain space and cryptocurrency markets, particularly in regard to ERC-20 tokens — Smart contracts also play an important role in the blockchain space and cryptocurrency markets, particularly in regard to *ERC-20* tokens

The Characteristics Of A Smart Contract

Smart contracts possess some distinctive features that mark them out from other forms of financial transactions:

Autonomy: Users have full control over their agreement. The smart contract is a guarantee by itself that excludes the possibility of interference by any other third party (broker, lawyer, notary, and more).
Security: An essential purpose of the smart contract is to ensure the safety of transactions. Information entered into the blockchain cannot be wiped out or modified. Even if one of the parties breaks the terms of the agreement, the agreement stays intact.
Speed: Document processing takes much time if performed manually, and this delays the task fulfillment. Smart contracts minimize personal participation and boost overall efficiency.
Trust: The transaction participants don’t need to trust each other or the third parties. A decentralized network provides the environment that ensures task completion without problems or delays.
Cost-effectiveness: It can eradicate excessively high transaction costs. And it is possible due to the removal of intermediaries from the process and agreement support.
Accuracy: The process is automated, so the possibility of human error is reduced significantly.

Smart contracts also play an important role in the blockchain space and cryptocurrency markets, particularly in regard to ERC-20 tokens, which represent a class of tokens created on the Ethereum network that follow the ERC-20 standard. These tokens are often distributed through Initial Coin Offering (ICO) events, and the use of smart contracts enables a trustless and cost-effective exchange of funds during sales. Their use can also facilitate payment processing for decentralized applications (DApps) or decentralized exchanges (DEX).

Decentralized applications (DApps) or Decentralized exchanges (DEX) — *Decentralized applications (DApps)* or *decentralized exchanges (DEX)*

Can Anyone change or delete a smart contract?

It’s impossible to add new functions to an Ethereum smart contract after it is deployed. However, if its creator includes a function called SELFDESTRUCT in the code, they are able to “delete” the smart contract in the future — and replace it with a new one. In contrast, though, if the function isn’t included in the code beforehand, they won’t be able to delete it.

Notably, the so-called upgradeable smart contracts allow developers to have more flexibility over contracts’ immutability. There are many ways to create upgradeable smart contracts, with varying degrees of complexity.

Taking a simplified example, let’s imagine that a smart contract is divided into multiple smaller contracts. Some of them are designed to be immutable, while others have the ‘delete’ function enabled. This means that part of the code (smart contracts) can be deleted and replaced, while other functionalities remain intact.

Smart Contracts are helpful in the decentralized crypto space

The Advantages Of Smart Contracts

There’s no one shoe fits all sizes kind of solution, and that includes smart contracts. Of course, it’s helpful in the decentralized crypto space, but it has its limitations too. The advantages of smart contracts are obvious and form the basis for smart contracts’ growing popularity. These are autonomy, security, high speed of performance, and the possibility to cut down costs associated with intermediaries. People choose them as they promise affordable yet accurate and efficient commercial transactions.

The Disadvantages

Errors in Smart Contract

Smart contracts allow excluding a possible failure of the human factor in operation, and that’s true. But at the same time, there can be mistakes and vulnerable places within the smart contract’s code itself. These mistakes can result in vast amounts of losses. There are more than enough examples of when platforms were hacked and funds were stolen because of some code mistakes. Take the ill-famous DAO hack for example.

Vague Terms

The legality of such smart contracts is another point of discussion. It is unclear how governments and legal authorities should treat and regulate them as they are out of the state’s legal system. It is a disputable question if they even can be qualified as contracts by governmental institutions. Being outside the legal system also means that criminals can utilize this technology for illegal activities. Ultimately, it’s because smart contracts are not always in black and white. Hence the terms and conditions are vague.

Privacy Infiltration

Transparency is a great thing, but not always. Sometimes users need some privacy. Some platforms attempt to offer “smart private contracts” to their users, but this practice is unusual. Besides, introducing new technology can also involve costs. Only an experienced developer can create a reliable smart contract.

Smart contracts are already going mainstream, and are soon to be replaced the traditional paper contracts in future

Future of the smart contract

Generally, smart contracts are already going mainstream. Of course, they will not completely replace traditional paper contracts in the next few years, but they will carve out their share in the market, particularly when buying or exchanging goods, services, and rights. It is no doubt that they will break into more and more spheres of people’s life.