what are smart contracts

What Are Smart Contracts in Web 3? — How Smart Contracts are Revolutionizing Industries and Shaping Up the Digital World

what are smart contracts

Imagine you visit an amusement park—you find there are no human staff yet every ride, game, and stall operates flawlessly. You purchase a digital ticket at the entrance, and this ticket serves as not just your entry pass but also your personal assistant for the day.

It knows which rides you can access, when and where you can grab your meals, and even when you can claim your souvenir. This ticket ensures everything runs smoothly, without any hitches or disputes. This is the magic of automation and trustless execution, and it’s exactly what smart contracts bring to the digital world.

In the age of Web 3 and decentralization, smart contracts play a very important role. They lay the foundation for a new kind of Internet—one that’s transparent, secure, and efficient—just like our imaginary amusement park.

With smart contracts, we can perform transactions, create agreements, and even build entire systems without the need for intermediaries. They are the silent gears that power the vibrant, dynamic world of Web 3, enabling us to interact with the digital realm in ways we never thought possible.

What are Smart Contracts?

Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They are like traditional contracts, but instead of being enforced by a legal system, they’re enforced by computer code running on a blockchain network.

Think back to your digital ticket as a Smart Contract. The moment you purchase this ticket, you’ve agreed to certain terms—like which rides you can access, when you can have your meals, and so forth. These terms are coded into the ticket (the Smart Contract), and it automatically executes these terms without needing a park manager or staff to ensure everything goes as planned.

The beauty of smart contracts lies in their automation and trustless execution. They don’t require intermediaries, like a lawyer or a bank, to confirm or enforce the agreement. Instead, the contract itself ensures that all parties involved follow the agreed-upon rules. If the conditions are met, the contract executes the agreed actions; if not, it doesn’t. It’s as simple as that.

For instance, let’s say one of the terms coded into your digital ticket is that after riding the roller coaster, you get a free ice cream. As soon as you scan your ticket at the roller coaster exit, the Smart Contract ‘sees’ that you’ve fulfilled the condition and immediately provides you with a voucher for your ice cream. No need for human oversight or manual verification; the contract handles it all.

What sets smart contracts apart from traditional contracts is not just their digital nature but also their ability to take immediate action. When traditional contracts outline terms and promise repercussions, they rely on external systems for enforcement if those terms are broken. Smart contracts, on the other hand, are self-regulating and self-executing, making them efficient tools for building the trustless, decentralized world of Web 3.

How do Smart Contracts Work?

Smart contracts are powered by two key technologies: blockchain and cryptography. Let’s explore how these technologies work together to make smart contracts possible.


At its core, a blockchain is a decentralized and distributed digital ledger that records transactions across many computers so that any involved record cannot be altered retroactively. It’s just like the public bulletin board in your school, where everyone could see what was happening, but no one could change what had been posted.

Smart contracts live on this blockchain. They’re stored on it, and every time they execute, it’s recorded on the blockchain. This means every transaction a Smart Contract makes is transparent, traceable, and verifiable​.



Cryptography is like the secure lock on each ride in our amusement park. It ensures that only the right people (or in this case, digital tickets) can access the ride. In the world of smart contracts, cryptography secures the data and keeps it safe from tampering or hacking.

Every transaction made by a Smart Contract is secured using cryptographic algorithms. These mathematical algorithms convert data into a format that’s nearly impossible to crack without the corresponding key, ensuring the security and privacy of each transaction.

Programming Languages

Just like different amusement parks might use different systems to run their digital tickets, different blockchains use different programming languages for their smart contracts. Ethereum, for example, uses a language called Solidity, while others like Cardano use Haskell or Plutus.

These languages allow developers to write the rules of the contract, define what conditions need to be met, and determine what actions the contract should take once those conditions are fulfilled.

In summary, the technology behind smart contracts is like the various elements that keep our amusement park running smoothly. Blockchain provides the public, unchangeable ledger; cryptography ensures security and privacy; and programming languages allow for the creation and customization of each contract.

Together, these technologies enable smart contracts to automate transactions and enforce agreements without the need for a middleman, paving the way for a more decentralized and efficient digital world.

Who thought about smart contracts in the first place?

History of Smart Contracts

The concept of smart contracts was first proposed by Nick Szabo, a computer scientist and cryptographer, in 1994. Yes, that’s right—smart contracts were conceived long before blockchain technology came into existence.

Szabo envisioned them as traditional contracts but with the ability to be digitally self-executed and self-enforced. He compared these digital contracts to a vending machine: you insert a coin (trigger a condition), and the machine gives you a snack (executes the agreement).

Fast forward to 2009, when Satoshi Nakamoto introduced Bitcoin and the underlying blockchain technology. While Bitcoin itself didn’t support smart contracts, its blockchain technology provided the perfect platform for implementing Szabo’s idea.

The real breakthrough came in 2015 with the launch of Ethereum, a blockchain platform developed by Vitalik Buterin. Unlike Bitcoin, Ethereum was designed with smart contracts in mind. It introduced a programming language called Solidity, specifically created for writing smart contracts. This made it possible for developers to write their own contracts and deploy them on the Ethereum blockchain.

Since the launch of Ethereum, the use of smart contracts has exploded. They’ve become integral to decentralized applications (DApps), Initial Coin Offerings (ICOs), and most notably, Decentralized Finance (DeFi). Other blockchain platforms like Cardano and Polkadot have also adopted and improved upon the concept.

Smart contracts have evolved from a visionary idea into a transformative technology. They are not only reshaping the blockchain landscape but are also revolutionizing industries like finance, real estate, healthcare, and more.

Just how are they doing that?

Use Cases of Smart Contracts

use cases of smart contracts

How do smart contracts aid and improve traditional real-world and digital processes? Let’s look at 7 specific areas:

  • Decentralized Finance (DeFi)
  • Supply Chain Management
  • Real Estate
  • Health Care
  • Voting Systems
  • Intellectual Property Rights
  • Energy Sector

1. Decentralized Finance (DeFi)

DeFi attracts a lot of attention due to its potential to disrupt traditional finance. Smart contracts form the backbone of DeFi, allowing for functionalities like lending and borrowing, yield farming, and decentralized exchanges to proceed efficiently without the need for intermediaries.

2. Supply Chain Management

In supply chain management systems, smart contracts act as the efficient operators ensuring each or product reaches its destination smoothly. They automate processes, verify product authenticity, and track goods as they move from one point to another, increasing transparency and efficiency.

3. Real Estate

Smart contracts are simplifying the complex process of buying or renting properties. They automate the transfer of property titles and rental agreements, eliminating the need for middlemen and reducing fraud.

4. Health Care

In health care, smart contracts ensure patient confidentiality while allowing secure and efficient sharing of medical records between authorized persons. They are also used to manage consent in clinical trials or automate insurance claims.

5. Voting Systems

Smart contracts can make voting systems more transparent and secure. They can ensure that each vote is unique and tamper-proof, potentially revolutionizing how elections are conducted.

6. Intellectual Property Rights

Artists and content creators can use smart contracts to manage copyrights and royalties. They allow creators to have more control over their work and ensure they get paid fairly for their contributions.

7. Energy Sector

In the energy sector, smart contracts can facilitate peer-to-peer energy trading. For example, if a homeowner has excess energy from their solar panels, they could sell it directly to their neighbor using a Smart Contract.

Like the revolutionary technology that it is, smart contracts have found use cases in a wide range of sectors. They are reducing friction, increasing efficiency, and fostering trust in ways previously unimaginable. And as humans continue to explore and innovate, the potential applications for smart contracts will only continue to grow.

Challenges Facing Adoption of Smart Contracts

“Everything that has an advantage has a disadvantage.” What are the challenges that have slowed the rate at which smart contracts are adopted? Let’s look at five of such ways:

  • Code Vulnerabilities
  • Legal Recognition
  • Complexity and Usability
  • Privacy Concerns
  • Scalability

1. Code Vulnerabilities

Smart contracts sometimes have code vulnerabilities typically called bugs. These vulnerabilities can be exploited by malicious actors, leading to significant financial losses. A prime example of such is the infamous DAO hack in 2016, where around $60 million worth of Ethereum was stolen due to a bug in a smart contract.

2. Legal Recognition

While smart contracts are contracts in a technical sense, their legal status is still unclear in many jurisdictions. This can create complications, especially when disputes arise. For smart contracts to gain widespread adoption, they need to be recognized and regulated by legal systems worldwide.

3. Complexity and Usability

Designing and deploying Smart Contracts requires a high level of technical expertise. This can limit their accessibility to non-technical users. Moreover, once deployed, Smart Contracts cannot be modified. This immutability can also be a challenge if contract terms need to be revised or errors need to be corrected.

4. Privacy Concerns

Blockchain transactions are transparent, which means that the details of a Smart Contract can be viewed by anyone on the network. This can raise privacy concerns, especially in cases where confidential information is involved.

5. Scalability

As more and more Smart Contracts are deployed on the blockchain, scalability can become an issue. Transaction speed can slow down and transaction costs can rise, impacting the efficiency and cost-effectiveness of Smart Contracts.

Despite these challenges, the journey of Smart Contracts continues with steadfast determination. Like engineers working to improve the safety and performance of amusement park rides, developers and researchers are continuously working to address these challenges. With advancements in technology and legal frameworks, we hope to see these challenges being overcome, paving the way for a wider adoption of Smart Contracts.

Choose Smart Contracts, Choose The Future

Smart contracts represent a transformative leap into the future of digital interactions. They are the guiding force that will ensure seamless, trustless execution of agreements as the world moves further into decentralization. From DeFi to supply chain management, real estate to healthcare, and even voting systems, smart contracts are enhancing trust in ways previously unimaginable.

The potential of smart contracts is boundless, and their adoption continues to gather momentum. As technology advances and regulatory frameworks mature, we can anticipate a future where smart contracts are not just the silent gears powering Web 3 but part of the foundation for a more transparent, secure, and efficient digital realm. 

The promise of smart contracts is not just a vision; it’s a reality in the making. Want to join the revolution?


  • Kingdom Harry

    Kingdom Harry is a Web 3 writer with more than two years of experience writing about the intersection between Web 3 and business. Harry is an expert in Web 3, Business, blockchain, and cryptocurrencies.

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