Blockchain-based smart contracts – what are they?

Blockchain is a breakthrough technology that is constantly developing and discovering new solutions. One of them is smart contracts. For most people, the term isn’t completely clear. Let me explain a bit their concept. What are they and how do they work? How different industries are able to benefit from them? Find out for yourself.

blockchain-based smart contracts

Smart contracts – what are they and how do they work?

Smart contracts were described for the first time by Nick Szabo in the early 90s. He characterized them as a tool that formalizes and secures computer networks through connecting protocols with user interfaces.

As the definition says, a smart contract is a computer program or a protocol of transaction intended for digital authentication, execution of negotiations, or performance of the contract. It’s a program created on the basis of the network and blockchain Ethereum, which is one of the biggest cryptocurrencies, right after Bitcoin. The contract is automatically executed after the conditions introduced into the program are met. The tool provides simplicity, speed of implementation, and real-time data updates. 

Smart contracts work basically in a very similar way to the traditional ones, with the difference that the terms of the contract are saved in the application using blockchain technology-specific conditions included there, and are based on a simple schema – if X happens, do Y. Smart contracts are transactions that can be used in many areas of everyday life, such as for example auctions, elections, escrow agreements, purchase and sales contracts and more. The most basic and appreciated advantage of smart contracts is the fact that they eliminate the necessity of third parties in case of concluding contracts, as well as between parties and intermediaries. But there are more profits that this solution brings. There are also some constraints and disadvantages of them. 

Leverages and constraints of smart contracts

The most basic and appreciated advantage of smart contracts is the fact that they eliminate the necessity of third parties in case of concluding contracts, as well as between parties and intermediaries. But there are more profits that this solution brings:

blockchain-based smart contracts


  • the solution is much easier and faster than the traditional ones,
  • they are less prone to errors and manipulations which makes them safe and reliable, 
  • agreements based on blockchain are updated in real-time which prevents delays in receiving information for each of the stakeholders,
  • using smart contracts eliminate also the need for intermediaries and central institutions to participate,
  • an additional aspect is a high level of security – smart contracts provide certainty and immutability because the contract itself operates on blockchain technology.

On the other hand, there are also some constraints and disadvantages of smart contracts:


  • some more complex concepts requiring additional interpretations are not able to be included in smart contract
  • transactions performed through a smart contract can’t be changed or reversed if they were incorrectly designed at the beginning
  • they can be quite problematic in terms of personal data, especially in the context of GDPR
  • unfortunately, there are no legal norms facilitating working with smart contracts yet – they’re quite modern

Smart contracts – use cases

Real estate 

Smart contracts may be treated as a broker between both parties of a transaction when it comes to real estate. Let’s imagine it on the example of renting a real estate broker – you need a support of an agent to make sure your transaction will be handled and executed in a safe manner. In that case, smart contracts enable a direct connection between the buyer and seller so you don’t need to complete tons of formalities or engage any additional person in between in this process. Thanks to blockchain technology, the payment for the property as well as the ownership are secured and distributed to all stakeholders at the same time, right after all conditions are met.

blockchain-based smart contracts

Supply chain management

Management of the supply chain is related to the managing of the flow of goods. It’s mainly about exchanging and saving data and physical products. Similar to the management of data, the administration of logistic chains often requires fulfilling an enormous amount of formalities which can be problematic and frustrating in the long run. Many companies are still using that system on a daily basis. The documents are regulated by many different stakeholders which increases the risk of manipulations and fraud. For that reason, companies decide more often to introduce the solutions of smart contracts. What is beneficial in that case is the fact that this type of managing documents minimizes the risk of potential frauds thanks to the high level of transparency of information flow. What is more, smart contracts are able to use data from the sensors to track the localization of goods and to register information about them when it comes to delivery. That means, if some item is lost during the process of transportation or delivery, smart contracts are able to read all data about the package and discover all circumstances of a theft or a loss. Many operations can be automated thanks to using of smart contracts, like planning the schedule of deliveries or checking the inventory.  

Healthcare industry

Another industry that can benefit from using smart contracts is the healthcare industry. Thanks to blockchain technology, all data about patients can be safely saved on servers, exchanging the old and unsecured paper systems. How can smart contracts come in handy here? They enable the secure transmission of documents between departments and institutions.  The only people who are entitled to read and manage those papers are authorized doctors who access these documents with a private key. Nobody without official permission is able to manage and administer the data about patients. Among the firms from the healthcare industry that take advantage of smart contracts are for example such companies as Encrypgen and Robomed

The above examples are not the only areas where there is potential for the use of smart contracts. The solution can be used in many more different sectors. Some of them are:

  • voting systems,
  • e-commerce payments,
  • orders automation,
  • trade of digital goods,
  • preventing counterfeits and trade of stolen goods,
  • automotive industry,
  • and more.


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Smart contracts as a safe alternative to paper contracts

As you can see, smart contracts could be a very safe alternative to the commonly used, traditional contracts. They help to prevent fraud and manipulations and resolve problems related to the lack of trust between the parties involved in the transaction. The solution is constantly being developed and the applications in many industries are endless. There is definitely still a lot more to be discovered regarding the potential of smart contracts. If you’re curious about more details regarding blockchain technology and want to get to know a broader definition of that technology, read our previous blog post.