After reading this post you will understand what smart contracts are? How does it work and why it is viewed as revolutionary? I’ll explain in very easy terms that how smart contracts work, the benefits they offer and the challenges they face. I’ll give you a short summary near the end with some visuals to help you get your head around the concept.

What are Smart Contracts?

A Smart Contract is very similar to a normal contract except that it’s completely digital If the piece of computer code stored on the blockchain because it’s completely digital. The smart contracts don’t rely on the third party. It removes the requirement to trust the third party.

Traditional Contracts always rely on a third party. For example, if I am going to rent a property from you, the estate agent will draw up a contract that we will both sign. I will then pay my deposit and my rent to the estate agent who will then pay it on to you before you give her the keys which she then passes on to me.

With both trusting the estate agent who is the third party in this instance to give the money and the keys to the right person.

smart contracts

Smart Contracts removes the need for that third party. It’s a secure online system for digitally verifying enforcing or facilitating an agreement. A smart contract is usually a piece of decentralized code that sends money when a certain input is received and records all information securely on the blockchain.

So in our rental example, the smart contract might be programmed to hold my rental payment until I have confirmed you’ve given me the keys. Once I’ve provided that information, the money is automatically sent to you. Smart Contract force people to be honest.

Henning Diedrich who said smart contracts are two legal banking and governance what the internet was to the music and film industries. So he clearly thinks they’re pretty revolutionary

Features of Smart Contracts

1. Dependent on Inputs

A smart contract is dependent on inputs. An input is when someone confirms that whatever is specified in the contract has been completed. Getting back to the example of renting a house in this instance. The input would be when I confirmed that you’ve given me the keys to the house. The smart contract would then be programmed to send you my rent.

2. A smart contract is Exact

The implications of the contract are pre-programmed on the blockchain. There is no flexibility at all. The system is programmed to perform an action such as send money. Once it has been triggered by a specific input such as confirmation that a service has been delivered.

The system is Bay’s its commands and only releases the money under pre-programmed parameters.

3. Smart Contracts are Unstoppable

The smart contract system obeys its commands under all circumstances. So if the input is triggered the output is going to happen even if the input is triggered accidentally.

4. Smart Contract is Irreversible

If a smart contract is programmed to release a certain amount of cryptocurrency when an action is triggered then it will do so. If you’ve accidentally sent the currency to the wrong account there’s not much you can do to get it back.


Smart Contract introduced the notion of trust business. You don’t need to trust any third party to enforce or facilitate the contract. They rely on Oracle’s. An Oracle is anything that feeds input into the blockchain and they’re necessary for just about any smart contract and many smart contracts are hosted on the Etherium platform which allows the developer to program their own smart contracts.

Also read: What are the Debentures? The Big Difference Between Shares and Debentures

Challenges of Smart Contracts

While smart contracts are promising as a technology that will revolutionize the legal and finance industries among others. They’re not without their challenges. Here are some of the issues facing smart contracts.


smart contracts

Most smart contracts operate using cryptocurrency which is incredibly volatile. If the currency crashes mid-contract while the money is growing, one party has lost money.  We don’t know yet how to make the smart contract legally binding. Especially since lawyers tend to shy away from programming and smart contracts are recorded on nodes or computer across many jurisdictions which makes them very tricky from a legal point of view.

Many people criticize smart contracts precisely because they’re so inflexible. The law is actually very flexible. Judges set precedent and reverse contracts all the time. This can’t be done with a smart contract.

Also See: Infographics Creator Tips: 8 Best Way to Make Attractive Infographic1 Star2 Stars3 Stars4 Stars5 Stars (No Ratings Yet)


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My name is Manoj Prasad and I am the founder of this website( I always love to learn new things through different sources and whenever I get time, I shared those new things with my friends, family and with you.

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