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Smart Contracts How it Works And What you need to know

The blockchain is strongly bound to smart contracts. The most noticeable use of blockchain is as a digital money. This explains why there are so many cryptocurrencies, as well as why Bitcoin is so famous. However, the roles are limitless since blockchain allows for the development of smart contracts. What are smart contracts, exactly? And what are all those almost limitless possibilities? This post explains it in depth.

What exactly are smart contracts?

To begin this overview of smart contracts, it is useful to know the precise definition:

“A smart contract (smart contract) is a programmed contract whose agreements are stored in machine code on the blockchain.” Without the need for (trust in) an intermediary, the contract is immediately enforced. These deals will still be interpreted, but they cannot be changed. ”

A smart contract is therefore anything but a paper contract that you sign with a pad, like we are used to. It is a completely interactive contract made up of just programming code that a programmer has placed together for you. This includes all of the contract’s facts, such as who the contract is legitimate for, when the contract may be completed, when the arrangements have been made, and so on. Here’s a brief (in English) video that explains what smart contracts are.

In a nutshell, smart contracts are agreements that:

  • be entirely digital;
  • comprise computer code;
  • blockchain-programmed;
  • be carried out automatically and without the use of an intermediary; and
  • It is difficult to adjust.
  • This offers a very abstract understanding of what it is, but let’s make it more concrete with a quick illustration.

Basic Illustration

A quick bet is the simplest definition of what a smart contract is ideal for. Assume Ahmed is a huge FC Barcelona fan, though Marco is a big Real Madrid fan. The match between these two championship challengers is approaching, and Ahmed believes FC Barcelona will win, although Marco believes Real Madrid will win. Ahmed wishes to put a ten-dollar wager. If FC Barcelona advances, Marco pays Ahmed ten dollars, and if Real Madrid wins, Ahmed pays Bob ten dollars. In the case of a draw, nothing occurs. Without a smart contract, you make this bet in good conscience, assuming that the other party can compensate in full if he or she loses. Ahmed is aware, however, that Marco may be a poor loser at times, and if FC Barcelona wins by an unjustified penalty, chances are he will not receive his money. This confidence is not required for a smart contract since anything can be programmed and registered.

Ahmed and Marco intend to register the bet in a smart contract, which will be launched based on the official outcome as reported by the Spanish football association. They all pay ten dollars on the deal (in cryptocurrencies) and set the contract such that if FC Barcelona wins, Ahmed receives twenty dollars from the smart contract, and Marco receives twenty dollars if Real Madrid wins. In the case of a draw, all players receive 10 euros.

The contract is placed on the blockchain, where it is immediately reviewed for all blockchain users, making it difficult to alter (Marco can therefore no longer determine that the result will not be if FC Barcelona wins due to an unjustified penalty). When the Spanish Football Association publishes the official result, the contract goes into effect and the winner receives his or her income.

Smart Contract Advantages

This scenario instantly illustrates some of the most important advantages of a smart contract. The only issue with Marco and Ahmed’s bet is that Ahmed is unsure if Marco would really compensate if Fc Barcelona wins. They may, of course, opt to have a written contract for each other, although this is a rare occurrence. Furthermore, even though Marco refuses to compensate, a complaint may result in Ahmed receiving ten dollars. Not perfect, and Ahmed must believe that his lawyer is superior to Marco’s. Furthermore, the smart contract’s bet is set as soon as it is entered into.

An unjustified punishment, no matter how unjustified, cannot alter the fact that the official outcome issued by the Spanish football association decides who wins the bet. Furthermore, everything is done automatically, with no human involvement. The blockchain means that the smart contract is implemented properly.

In a nutshell, here are the advantages of smart contracts.

  • The smart contract is on the blockchain, but you can trust it. The blockchain is a peer-to-peer network. Both devices attached to it monitor it automatically. As a result, each of these machines has a copy of the blockchain. This ensures that no one has the authority to amend the deal.
  • Autonomy — You are the one who enters into the deal. There is no need to put your interest in a bank, prosecutor, dealer, or other third party. As a result, these individuals are unable to use the contract to their benefit. Furthermore, you won’t have to think about the other party wanting to get out of the contract. The network manages and executes the contract dynamically.
  • Security — A smart contract is protected by the best cryptography available today. This is almost hard to crack.
  • Swiftness — The smart contracts are fully automated. Any activities that would usually require a ton of documentation can now be completed in a matter of seconds thanks to a smart contract. This saves a significant amount of time and effort. Furthermore, the code is being improved on a daily basis, but it can only become better in the coming years.
  • Backup — Since everybody has a backup of the blockchain, the transaction cannot be lost.
  • Savings — Smart contracts are far less expensive than conventional contracts. This is mostly due to the elimination of the need for intermediaries (with exorbitant hourly wages). For example, you no longer have to arrange for a notary or prosecutor to draft the document to guarantee that it is carried out.
  • Precision — Robots perform smart contracts. As a consequence, human mistakes are (almost) non-existent.

Smart Contracts have the potential to disrupt industries

As we all know, blockchain has the ability to transform banks in the same way that the internet transformed post offices and libraries. Our Ahmed and Marco illustration demonstrates that it has the potential to reshape the gambling market, but it will not end there. The possibilities are limitless, and it has the potential to totally transform virtually every sector, just as the internet has.

Food Regulation

The food market is where you’ll see a lot of new trends. People are becoming more conscious about what they eat and how it impacts the earth, the atmosphere, and the less fortunate. Tony’s Chocolonely (committed to paying cocoa farmers a good price for their cocoa), Fair Trade, and sustainable food are a few examples. But who verifies that the goods you purchase are really sustainable, or how much Tony’s Chocolonely compensates cocoa farmers? This is still based on confidence, but due to blockchain technologies and smart contracts, this will soon be automated and fully open.

  • Smart contracts mean that the course taken by food is fully clear and cannot be altered. You will see which farmers, mills, and trucks your goods have passed through.
  • A chicken from a laying hen factory is thereby licensed in this manner and can no longer be marketed as an organic chicken.
  • The farmers of Tony’s Chocolonely will accurately show how many euros they have sold their cocoa for, allowing it to be determined which chocolate brand gives the most back to the cocoa farmers without being exploited.

Clothing Inspection

In which sector is it much more necessary to be able to monitor the origin of your product? The fashion business. Because how can you be certain that the Rolex being given to you is genuine and not a forgery? How do you know if the Gucci bag is authentic and not a cheap knockoff? You will shortly be able to see all of this at a glance thanks to blockchain and smart contracts. Through a quick check of the barcode, fake clothes can be instantly identified.

Smart contracts combined with RFID enable you to see precisely where your Rolex or Gucci bag came from and whether it is a genuine product or a cheap counterfeit.

You can tell whether a bag is made of genuine leather, for example.

You should search to see if the car you purchased used on the street is really from 2013 and has just 80,000 kilometers on the odometer.

Tickets and Music

A major issue for artists right now is that their songs can be accessed for free from everywhere. You would assume that artists like Justin Bieber and Ariana Grande make enough money on their own, but for them, there are thousands of other artists who must suffer. Furthermore, it is not appropriate to ‘steal’ their music because of their celebrity. Platforms like Spotify and iTunes compensate for a ton, but these intermediary platforms receive millions from musicians. Smart contracts will also create a difference in this case.

An artist can upload his or her music to the blockchain and state in the smart contract that consumers can listen to the song in exchange for a small fee (for example 0.1 cents). As a consequence, no intermediaries that charge commissions are needed.

Artists and entertainers placed their show or event pass on the blockchain. In the smart contract, they set a limit price. As a consequence, retailers will no longer purchase vast quantities of tickets and resell them for four times their face value.


For us, it’s a far-off film, yet an enormous number of people on this earth go through their lives without knowing who they are. The nation from which they come has clearly lost this or has tampered with it in such a way that an individual from Kuwait claims to be from Afghanistan on his passport. It might sound simple to us, but if we were forced to survive without an identity for a year, we might realize how crucial getting an identity is. Through a smart contract, you may regain control of your identity without relying on a (malicious) government.

At birth, your identification is registered on the blockchain, to which only you (and your parents) have access. No one will really be able to change this. Only you have the ability to add items to this, such as a recent picture. This way, you will really demonstrate that you are who you claim to be.

No one will now take your name. Your identification is unhackable, and the only way to unlock it is with your private key.

Smart Contract Platforms

There are currently many blockchains on which smart contracts can be easily created. The most well-known of these is Ethereum. With the programming language Solidity, programmers can create a smart contract on this blockchain pretty quickly. As a consequence, decentralized applications (dApps) profit from the Ethereum network whilst still dealing with its drawbacks. Since Ethereum is the most comprehensive forum for smart contracts, it has hosted by far the most ICOs. Any of the most well-known are EOS, TRON, VeChain, OmiseGo, and ICON.

However, Ethereum is not the only site where initial coin offerings (ICOs) take place. NEO, in particular, is already on the rise, with many ICOs on the path that will use the NEO network, as seen here. Qtum, Waves, Omni, and also Bitcoin are other blockchains that can be used with smart contracts (using a new technology called Rootstock).

Smart contracts are being used by an increasing number of cryptocurrency exchanges in order to organize their offerings in a more decentralized manner.

Smart Contract Disadvantages

It is still easy to focus only on the benefits of a modern disruptive technology, such as smart contracts, but nothing is without drawbacks. As a result, we believe it is important to emphasize the drawbacks of smart contracts in this description.

  • Customization is Impossible — We listed it earlier as perhaps the most significant benefit of smart contracts, but it is also a significant drawback. If you’ve signed a rental agreement but want to amend it, it’s not so easy. Of course, there are avenues to come out of it together, but it would require a lot of time.
  • The code must provide for all — in a typical contract, “ifs and buts” are often included. People waste years in research benches just to get this a little clever on paper, let alone if it has to be processed in a programming language. As a result, it is (after all) very susceptible to human error.
  • The third party will not vanish fully — While the third party is no longer needed, it will not vanish entirely. The third party is primarily assigned a distinct function. The market for programmers, in particular, would skyrocket, despite still being extremely strong. This will make them much more costly, and therefore creating a smart contract would be very expensive.

There are numerous other disadvantages to remember. What if there is a flaw in the code that causes something entirely different than expected? How is it determined that this was an error? Who is liable for the expenses sustained as a result? And how can you stop an erroneous smart contract? Since technology is also in its infancy, there are certain situations that are yet to be considered.

Smart Contract’s Future

Overall, the prospect of smart contracts seems to be very promising. It has the potential to have the same effect on our culture as the internet. It has the potential to have an effect on almost every market. Smart contracts will eradicate the need for intermediaries, which saves vast amounts of money and time, but it often jeopardizes the employment of many citizens.

The most difficult obstacle for the time being, though, is determining how to comply with smart contracts lawfully. There are so many problems about which we do not have a remedy, and as long as these remain unresolved, we must wait for the change that smart contracts will bring about.

Originally published at on July 12, 2021.




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Max Neuhaus

Max Neuhaus

Crypto investor and trader :: Follow me for info

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