Smart contracts in blockchain (2024)

Smart contracts have become an indispensable part of a blockchain’s full functionality. Similar to a traditional contract, they define an agreement through if-then conditions. The difference is that the conditions are coded and execution automated when it is confirmed they have been met.

They have favourable properties such as being highly efficient and traceable and don’t require a centralized authority to control them.

Smart contracts work in a predefined and straight-forward way requiring for rigid inputs in the form of met conditions to deliver a desired output.

If you have traded cryptocurrency before, the conditions for these transactions are defined in smart contracts. For example, once the seller deposits a predefined amount of Bitcoin onto the smart contract’s escrow account and that matches with the equivalent in US Dollars deposited by the buyer, the exchange will be automatically executed by the smart contract – it’s if-then condition having been met.

Smart contracts are used in dApp blockchain applications being increasingly deployed to automate processes across industries including finance, real estate and supply chain management.

Different programming languages can be used to develop smart contracts. Solidity is the most used language in smart contract coding and boasts the most extensive ecosystem. The Web3-native language is supported by major blockchain networks such as Ethereum and the Binance Smart Chain.

This comprehensive starting point will give you an insightful overview of what smart contracts are, how they work, how they are coded and their role in Web3 technologies.

What are Smart Contracts?

Smart contracts define the terms of an agreement or deal, like any other contract. They are coded protocols that serve as a digital agreement and are hosted and executed on a blockchain. The agreement between two or more parties is inscribed into code.

Running on a decentralized blockchain, smart contracts make it possible for several parties to reach a desired shared outcome in an accurate, tamper-proof and timely way.

Transactions made with smart contracts provide many benefits compared to traditional transactions on a centralized server. In the right context, they are highly efficient, transparent, traceable, irreversible, low cost and low risk.

How Do Smart Contracts Work?

Smart Contracts are created by programming a contract code in a specific language, such as Solidity on the Ethereum Blockchain. Other languages that can be used to code smart contracts include Rust, Go(lang) and Python.

There are If-Then conditions embedded in this code that trigger specific actions if certain requirements are fulfilled.

If-Then condition example – escrow agreement

If: A seller deposits a defined amount of cryptocurrency into the smart contract’s escrow account by a certain date and buyer does the same, in cryptocurrency or fiat currency depending on the agreement.

Then: The smart contract automatically releases the funds deposited by the buyer to the seller’s account and cryptocurrency to the buyer’s crypto wallet.

In this scenario, the smart contract acts as an automated escrow service. The condition is the deposit of funds by the buyer matching the price agreed with the seller. If this condition is met (the buyer does deposit the funds), the smart contract then executes the predefined action (releases the funds to the seller and cryptocurrency to the buyer).

If the condition is not met (the buyer does not deposit the funds by the deadline), the smart contract does not execute the action, and the funds could be returned to the buyer or remain locked until further conditions are met.

This is a very simple example – usually smart contracts will comprise multiple if-then conditions.

Smart contracts can also be used to create blockchain applications – replacing logic that would otherwise be coded on the backend of a Web2 application, shifting it to a blockchain.

The example given could be a smart contract that forms part of a DeFi app like that of the U.S.-based Web3 startup Ajna a .

Smart contracts are created and run in 6 steps:

1. Establish terms of agreement and define conditions

The parties involved in the transaction or exchange must come to an agreement on how the smart contract should respond to certain input criteria and what conditions must be met for a contract to execute a certain way.

Examples of conditions coded into smart contracts include proof-of-funds, transfer of funds, digital identity or ownership of real estate.

It should also be determined whether the contract will execute automatically.

2. Creating the Smart Contract

Once the if-then logic a smart contract will enforce is agreed on it should be coded.

A suitable programming language is used to write code that contains the contract terms of agreement and conditions. Smart contract developers should also test the logic for potential bugs in a similar process to testing backend logic.

It’s important that smart contracts are coded to comply with high security standards. A separate team is usually involved in security testing of contracts.

3. Deployment onto a blockchain

The smart contract is then deployed on a blockchain platform or another distributed ledger infrastructure. This involves approving the contract’s validity.

Once a smart contract is deployed and live on a blockchain, it is irreversible. It is important to note that blockchains are immutable – once data has been recorded onto them, it can never be changed, except by a reverse transaction which is also permanently recorded.

4. Searching for conditions to execute

The blockchain is now being monitored by the smart contract looking for the determined if-then conditions to be fulfilled.

This can be nearly anything that can be verified digitally, or it can be a specific action performed by one or more parties involved.

5. Execution of the smart contract

Whenever a consensus is reached between all parties involved and triggering conditions are met, the smart contract is executed. The smart contract is automatically activated by the blockchain.

6. Blockchain is updated with contract’s details

After a smart contract is successfully executed, the blockchain network is then updated, immutably recording all the details of the transaction managed by the contract’s terms.

Once the record is stored on the blockchain, it can’t be changed or removed (the definition of immutable) and is visible to anyone with access to the blockchain.

What Are the Properties and Benefits of Smart Contracts?

Smart contracts offer several benefits compared to traditional contracts that require a centralized intermediary (such as a bank or notary) that exerts asymmetrical power over the transaction determined in the contract.

The core properties and benefits of smart contracts are:

Distributive

A blockchain network consists of distributed nodes, all of which hold a full or partial copy of the blockchain’s history. These nodes are constantly updating their data collection to match each other. This data also includes smart contracts hosted on a blockchain and all actions and transactions their fulfilment leads to. .

Deterministic

Smart contracts only execute in a predetermined way if the required conditions are met. The code gives the contracts rigidity. No matter which party executes them, the outcome will always be the same.

Autonomous

No centralized authority is required to operate smart contracts. Once they are deployed on a blockchain, they run autonomously. Whenever the if-then conditions of a specific smart contract are met, it is executed automatically. Usually, smart contracts stay dormant on a blockchain if no one triggers their conditions.

Immutability

Once a smart contract is deployed on a blockchain network, it can’t be altered. There is, however, the possibility to include a “self-destruct” function in the code so that involved parties can delete a smart contract and replace it with a new one on the blockchain. The decision whether to include such a function must be made during the programming stage of the smart contract.

Increased Trust

Whenever one party interacts with another party via a smart contract on a blockchain, they don’t need to know who they are interacting with. They don’t even need to trust each other. The properties of a smart contract inscribed into its code make sure that the interaction happens according to its terms of agreement, without the need of a third party.

Transparency

Since the blockchain is publicly accessible (and so are the smart contracts on it) anyone with access to the blockchain can view it and check properties and transaction details. This increases safety and security.

Security

Smart contracts remove the need for a central authority that issues and controls contracts. Located on a decentralized blockchain, smart contracts pose no central point of failure vulnerable to attacks and no centralized intermediary to negotiate with. There is also no way for any of the involved parties or a central authority to manipulate the outcome of the contract.

To ensure the consistency and accuracy of code in smart contracts, which reflects on the code’s safety, testing is usually required. According to Tim Reznichenko, a senior Web3 developer at K&C, tooling for smart contract testing is currently improving at a rapid pace.

Tools are already increasingly available, including test suites for rare cases such as “fast tests”. According to Tim, smart contracts written in the programming language Rust are intrinsically safer and require less testing compared to contracts written in Solidity.

Efficiency

Programming a smart contract doesn’t take much time and its processing and execution on a blockchain is self-sustaining. Traditional contracts involve bureaucracy and are error prone. Time and money can be saved by the automated character of smart contracts. Their correct enforcement is also not subject to human error or the availability of resources.

Low Costs

The use of smart contracts eliminates the need for intermediaries (such as banks and brokers), leading to reduced transaction costs.

Applications and Use Cases of Smart Contracts

The blockchain technology in general has proved to be useful in many industries, as you can read in our blog post on blockchain development use cases.

Some of the sectors that have been quick to innovate with smart contract-powered blockchain applications include:

Financial Sector

Smart contracts can be used in and to execute various financial services and products such as automated payments, tokenization, asset management and decentralized finance applications (DeFi).

Real Estate

Property ownership in real estate can be regulated and transferred using smart contracts. Smart contracts make sure that all conditions defined in its terms of agreement are met before a property is handed over.

Rent contracts can also be managed using smart contracts, including handling automatic adjustments to the rent price based on market conditions or other factors.

Insurance

Using smart contracts, insurance companies can automatically process claims and significantly reduce costs. Relevant information on a certain insurance case can irreversibly and transparently be saved on the underlying blockchain.

Let’s look at an example on travel insurance. A smart contract can be programmed to monitor flight information. If the flight departure exceeds a predefined delay, the smart contract can automatically release a compensation to the insured person.

Another example would be crop insurance. A smart contract could be coded to monitor precipitation data in a certain area. If rainfall exceeds or falls short (depending on the predefined conditions in the contract) of a certain threshold, compensation is released.

Supply Chain Management

Smart contracts can be used to code and execute each step of a supply chain automatically, from the order to the delivery. They can monitor delivery dates and other delivery conditions automatically to ensure a smooth and transparent supply chain management. Payments can also be regulated via the contract upon the delivery of goods.

Gaming, Crypto and NFTs

There are video games running on blockchains. Smart contracts define actions in a game when certain if-then conditions are met.

Crypto currency transactions are often based on terms and conditions defined in smart contracts. Rules are laid down for the transaction of crypto. This ensures high transparency and safety during transactions. The same can be applied to the exchange of NFTs.

What Languages Are Used to Code Smart Contracts?

Smart contracts are programmed in different languages. There is no one-language-fits-all solution since different blockchains support different languages. The choice of blockchain may be partly influenced by the preferred language for coding smart contracts. If a blockchain supports smart contracts coded in different languages, technical and commercial considerations will dictate the choice. To find out more about which blockchains support smart contracts and their benefits and drawbacks, check out our blog post on blockchain platforms for smart contract development.

For developers looking to jump into the Web3 space, the languages Solidity and Vyper are good choices to get familiar with smart contract programming since they are relatively easy to learn and similar to mainstream Web2 languages such as JavaScript and Python.

Find a list of languages and their compatible blockchain networks as a concise overview:

There are many more languages to program smart contracts. A comprehensive list would however be too extensive for this blog post. We go into more detail on the five most popular languages in the subsections below.

Solidity

Solidity is currently the most used programming language for smart contracts. According to K&C’s Tim Reznichenko, it has a lot in common with JavaScript and TypeScript and is therefore relatively accessible to developers with previous knowledge in these languages. This object-oriented and statically-typed language also benefits from the most extensive and developed ecosystem of the Web3-native languages.

When smart contracts and their associated dApps are developed on the Ethereum blockchain or EVM (Ethereum Virtual Machine)-compatible blockchains, the language of choice is Solidity – unless there is a clear reason for another language.

Vyper

Vyper is a contract-oriented programming language running on the EVM. It is most similar to Python. Vyper was built to improve security issues present in Solidity. This is why Vyper has fewer features than Solidity, to make smart contracts more secure and easier to code.

Rust

Rust is a “low-level” or system programming language. That means it can interact closely with the hardware, without the requirement of an intermediary layer. This language is not exclusively a smart contract language; it is used in Web2 also. Properties like being a “strongly typed” language make it relatively difficult for beginners to learn or for developers with experience in other languages to adopt.

Several blockchains such as Solana, Polkadot or Hyperledger Fabric support the language. If the choice of the blockchain is Solana, smart contracts must be written in Rust since there is no cross-compatibility.

Smart contracts programmed with Rust are generally safer. This is because the language is intrinsically technically correct in its coding; if the code contains mistakes, it simply won’t compile.

Read more about this language in our dedicated blog post about Rust.

JavaScript

JavaScript is a traditional programming language that has found its way into Web3 programming as well. Due to it being an entry-level language, most blockchains tend to create libraries based on JavaScript to allow for developers to easily get used to the ecosystem and start building products without an extensive adoption stage.

For example, Hyperledger Fabric is a blockchain that allows to build smart contracts using JavaScript or its runtime environment Node.js respectively.

JavaScript has been incorporated in various parts of blockchain development. However, it’s not used to develop the core of blockchains due to its weak type checking.

Yul

Yul is an intermediate programming language most similar to Solidity. Bytecode compiles this language allowing for different backends.

Yul can be used as a stand-alone language or for inline assembly within Solidity projects.

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