What are Smart Contracts and How do They Work?

Smart contracts are contracts that are digital in nature and are stored on a blockchain that automatically executes when the terms and conditions are being meant. These contracts are automatically used to execute an agreement.

Smart contracts

What is a Smart Contracts?

A smart contract is a transaction protocol which intends to automatically execute, control or document events and actions according to the terms of the contract or agreement.

What Are The Types of Smart Contracts?

Some of the major smart contracts are grouped and classified into:

  • Smart Legal Contracts
  • Decentralized Autonomous Organization (DAO)
  • Application Logic Contract (ALCs)

Smart contracts Pros and Cons

Smart contracts usually have some benefits and at the same time, some downside on its employment. Some of the pros and cons of smart contracts are:


• Factual Ownership

It is possible for investors to gain fractional ownership of single high value assets. The programming of the smart contracts enables issuers to break up singular asset into infinite fragments and then can be invested into by different investors.

• Enhanced Transparency and Immutability

Smart chain enhances transparency which was not traditionally possible. Also, it helps to reduce risk of frauds, manipulations and high cost involved in the traditional processes.

• Automation

Smart chain helps to eliminate a range of overheads such as financial analysis charges and by ease of automation, the cost for the securities issuer and buyer are significantly reduced.


• Faulty Code

A major security concern of using smart contracts is the possibility of bugs in the contract itself and due to immutability of the blockchain technology, cannot be removed. Even when they can, the process is highly cost and resource intensive.

• Scalability

This is also a concern of the blockchain technology, it has implications which tends to give rise to other security concerns. Despite some solution being available by usage of POW and POS, these framework comes with its own security concern and Scalability limits.

• Complexity Limitations

This is closely related to Scalability, the cost of transactions ” gas limit” is dependent on lines of codes to be executed, a rise in complexity of the contract also result in cost of testing and executing contracts. It not only limits the complexity of contracts but also hampers their security as they cannot be properly tested.

What are Smart Contract Platform?

Smart contract platform are means where the smart contract can be executed. Some of which are:

• Ethereum

This is the world‘s leading smart contract platform and is the top choice for most developers. It has a set of clearly defined rules for developers to follow, making smart contract development easier and less risky.

• Polkadot

Polkadot is a protocol that enables cross-blockchain transfers of any type of data or asset. By uniting multiple blockchains, Polkadot aims to achieve high degrees of security and scalability.

• Tezos

Tezos is an open-source platform that addresses key barriers facing blockchain adoption for assets and applications

• Stellar

The purpose of Stellar is to connect financial institutions via the blockchain and provide cheap transactions in developing markets.

• Solana

Solana is a highly functional open source project that banks on blockchain technology’s permissionless nature to provide decentralized finance (DeFi) solutions

How Does a Smart Contract Work?

Smart contract work by following simple statements which are written into code on a blockchain. A network of computers executes the action when the conditions have been met and verified. Some of the actions may be sending funds to the appropriate parties, sending a notification or issuing a token.

Read also: Top Ten Free Blockchain Courses You Can Get in 2021

The blockchain is then updated when the transaction is completed. That means the transaction cannot be changed and only parties who have been granted permission can see the results.

Participants must establish terms and determine how transactions and their data will be represented in the blockchain, agree to what questions and rules they would like to govern these transactions, choose all possible exceptions and define the framework for dissolving disputes. Then the smart contract can be programmed.

Smart contracts are complex, and their potential goes beyond the simple transfer of assets. They can execute transactions in a wide range of fields, from legal processes to insurance premiums to crowdfunding agreements to financial derivatives. They can help to bridge the legal and financial fields by simplifying and automating routine and repetitive processes for which people pay huge amount for.

We hope this article will give you an insight in smart contracts, how it works and the platforms where it can be accessed. You can make your review and suggestion in the comment section.


About Author

Smart contracts
Marshal NosaCEO
I'm a professional digital marketer with over 7 years of experience in the field. I create well researched content related to finance, cryptocurrency, stocks, forex and metaverse related articles.

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