What are Smart Contracts in Blockchain and How Do They Work?
10 May

What are Smart Contracts in Blockchain and How Do They Work?

Category : Blockchain / by

The first well-known implementation of blockchain technology was Bitcoin, a peer-to-peer system meant to enable value transfer without the use of a central entity. It performed really well and is still perhaps the most resilient deployment of blockchain applications today.

But the blockchain would never have taken it to the forefront of technological breakthroughs if a number of crucial technologies had not been added to Bitcoin’s restricted functions, and smart contracts were a fundamental basis of that revolution. Smart contracts have several commercial benefits, including trust, transparency, security, autonomy, and accuracy.

In a decentralized society, trust is not required to make things work. Blockchain eliminates the need for members to rely on a single party to function authentically. No more leaving your company’s survival to a third-party mediator in the hope that they would always do the right thing. With blockchain, each member has power, but no one has complete control. To implement this self-governance, blockchain designs utilize a variety of technologies. So far, smart contracts are the most developed and commonly used technology.

A smart contract is a computer program that is performed independently by a quorum of blockchain nodes in order to record the most recent program state.

It might seem complex, but let us take a close look at it.

Smart Contracts: A Basic Definition

Smart contracts are programs that can be executed. They are often built-in high-level computer programming languages to express arbitrary business logic or pre-defined criteria for triggering value transfer.

To be effective in supporting a wide range of use cases, a smart contracts engine’s language must be Turing complete, which is a fancy computer science word that means the language can be designed to handle any computing issue.

As a result, despite the fact that it is possible to write in the Bitcoin scripting language, Bitcoin is not regarded to have a smart contract due to its restricted features. Ethereum was the first to allow smart contracts, ushering in an age of fast innovation to address some of the most difficult challenges in technology and society alike.


The primary function of smart contracts is to preserve program states. A transaction updates a state, which is an arbitrary piece of data. In this respect, a blockchain may be thought of as a database, however, it’s meant to prioritize data consistency and immutability over speed and query functionality. Almost all blockchain protocols are built with a state transfer conceptual model in mind.

Every smart contract has its own set of states. With the exception of pure value transfers that do not require smart contracts, the majority of transactions uploaded to a blockchain target a smart contract. When a transaction is completed, the target smart contract’s state is updated. A smart contract can call another smart contract to query or update the status of the downstream contract.


The following are some of the most popular platforms for developing and executing smart contracts on blockchain:

  1. Ethereum: smart contracts are authored in the Solidity programming language and executed by the Ethereum virtual engine. It is presently the most widely used.
  2. Hyperledger: an open-source system created by the Linux Foundation that is not a cryptocurrency but rather a flexible platform on which smart contracts may be built.
  3. Counterparty: This platform inserts data into Bitcoin transactions, i.e. it makes use of the cryptocurrency’s blockchain and allows contracts to be built on it.
  4. Polkadot: Polkadot is a blockchain alternative known for its capacity to support parachains, or chains inside chains, allowing for more transactions than normal.


Smart contracts provide several advantages to the parties involved:

  • Independence: the participants make their own arrangements, hence the presence of middlemen is unnecessary.
  • Reliability: the contract is securely kept on a distributed network and is nearly hard to change or counterfeit.
  • Security: Because the contract is distributed, it is copied in all network nodes and cannot be lost.
  • Savings: By eliminating intermediaries and commissions, expenses are reduced for all parties involved.
  • Accuracy: The risk of inaccuracies in the terms of processing is eliminated with this sort of contract.


The functioning of a smart contract is identical to that of other blockchain transactions.

The following are the actions that must be taken:

  1. A user starts a transaction from their blockchain wallet.
  2.  The transaction reaches the distributed database, where the identification is validated.
  3. The transaction, which might be a financial transfer, is approved.
  4. The transaction comprises the code that specifies the type of transaction to be executed.
  5. The transactions are recorded as a block in the blockchain.
  6. Any change in contract status must go through the same process to be updated.

Recommended Read: Blockchain in Real Estate: How its changing the Real Estate Industry?

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