Smart contracts – what can they do?

We answer what a smart contract is, what they do, and how blockchain factors into the picture

Certainly, each of us had the opportunity to finalize the contract – a formal document regulating the rights and obligations of the parties to the agreement. Tons of pages of legal mumble lying on our shelves and in drawers. Usually, we do not come back to them, we treat them as a formal duty. And what if one of the parties fails to comply with the contract? Does the contract protect us enough to quickly get out of the conflict? Well, most likely not really.

But thanks to the fact that we live in a digitized world, the situation is changing—quite rapidly in recent years.

smart contracts

What is a smart contract?

In 1994, Nick Szabo1 proposed the idea of smart contracts:

A smart contract is a computerized transaction protocol that executes the terms of a contract. The general objectives of smart contract design are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries.

What can a smart contract do?

Smart contracts can be used to directly control the transfer of digital currencies or assets between parties. They define rules and conditions around an agreement, including penalties, and automatically enforce all contractual obligations. Essentially, these automated, computer-based contracts work like any other if-then statements. They simply do it in a way that interacts with real-world assets. When a pre-programmed condition is triggered, a smart contract executes the corresponding contractual clause.

Smart contracts and blockchain

Blockchain enables the creation of smart contracts, with terms and conditions parties specify and encourage enforceability and the identity of the counterparty. A blockchain smart contract consists of a computer program that runs on the blockchain and is executed by the entire blockchain network. The program code—terms and conditions of the contract—cannot be changed.

To start using smart contracts you will first need to choose the best framework that fits your needs. Then you just start to code. For example, for Ethereum2:

Smart contracts are account holding objects on the ethereum blockchain. They contain code functions and can interact with other contracts, make decisions, store data and send ether to others. Contracts are defined by their creators, but their execution and by extension the services they offer, are provided by the ethereum network itself. They will exist and be executable as long as the whole network exists, and will only disappear if they were programmed to self destruct.

Traditional contracts vs. smart contracts

Blockchain contracts not only contain the same level of detail as a physical contract but they also do something no conventional contract can: these contracts can perform tasks such as negotiating prices and monitoring inventory levels. This capability replaces expensive, manual effort with automated, dynamic tracking of supply chains, inventory levels and prices to reduce costs and maximize profits.
For these reasons, a significant increase in the market value is forecasted3 (see Figure 1) and people trust it (see Figure 2). Do not stand still, be smart!

Table 1 Traditional contracts vs. smart contracts

Feature Traditional contract Smart contract
Authorization Signature Digital signature
Form Physical, paper Virtual
Dispute resolution Judges, lawyers Decentralized network
Execution Manual Automatic
Cost Expensive Cheaper
Time of execution Days Minutes


Figure 1 Forecasted global smart contracts market growth. Source: Smart Contracts Market Research Report – Global Forecast to 2023

Figure 2  A role for Smart Contracts. Source: Deloitte blockchain executive survey4


1. Szabo N. (1994). Smart Contracts [Article].
3. The global smart contracts market is expected to reach approximately $300 Million USD by the end of 2023 with 32% CAGR during the forecasted period from 2017–2023.
4. The survey was conducted online in 2016. For more information read here