What are smart contracts, and how do they work?

Imagine a world where contracts enforce themselves. No lawyers, no middlemen, no waiting — just automated agreements that execute as soon as certain conditions are met. This isn’t a scene from science fiction; it’s the promise of smart contracts, a revolutionary application of blockchain technology. First envisioned by computer scientist Nick Szabo in the 1990s as a “computerized transaction protocol,” smart contracts automate processes that typically rely on trust, paperwork, and human oversight.

By embedding the terms of an agreement directly into code, these digital contracts enable secure, tamper-proof execution on a blockchain network without a central authority. Whether it’s managing real estate transactions, tracking supply chains, or facilitating decentralized applications (dApps), smart contracts are reshaping how we conduct business and handle agreements in the digital age.

Let’s explore what smart contracts are, their uses, how they work within blockchains, and their pros and cons to understand their transformative potential.

What is a smart contract?

A smart contract is a digital agreement coded into a blockchain. This agreement holds crypto assets, money, or some other consideration (the things exchanged for value in a contract) and automatically executes the contract when all predefined conditions are met. 

Think of it as a vending machine for contracts: you input money (conditions are met), and the machine dispenses your item (contract terms are fulfilled). There’s no need for human intervention or intermediaries.

The concept was first introduced by Nick Szabo, who imagined them as tools to reduce reliance on traditional methods of enforcement and increase efficiency. He coined the term “smart contract” to describe a system that executes contractual clauses using technology instead of manual oversight.

Smart contracts operate on blockchain networks, like the Ethereum blockchain, where the contract’s code is stored and executed. These contracts are written in programming languages such as Solidity (used on Ethereum) to ensure the terms of the contract are fulfilled without bias or human error. The blockchain’s distributed ledger ensures the contract’s terms are immutable, transparent, and verifiable by all involved parties.

What are smart contracts used for?

The versatility of these contracts has led to their adoption across a wide range of industries. Some common use cases include:

1. Real Estate Transactions
   Smart contracts streamline real estate deals by automating processes like escrow management and title transfers. For example, once all certain conditions (like payment) are met, ownership records can automatically update on the blockchain.
2. Supply Chain Management
   Businesses use these kinds of contracts to track goods through a supply chain. Automated triggers ensure payments are made or alerts are sent as products move through each checkpoint.
3. Digital Assets and Non-Fungible Tokens (NFTs)
   In the world of digital assets, smart contracts are essential for minting, buying, and selling NFTs. These contracts verify ownership and transfer rights between multiple parties seamlessly.
4. Decentralized Finance (DeFi)
   This technology powers DeFi applications, enabling users to lend, borrow, or trade assets without traditional banks. Automated protocols replace intermediaries, reducing fees and increasing accessibility.
5. Legal Contracts
   As smart legal contracts, they can serve as enforceable agreements between contracting parties, particularly for routine agreements like service-level contracts or freelance work.

These examples highlight how smart contracts reduce reliance on intermediaries, increase efficiency, and ensure trust in complex processes.

What’s the difference between smart contracts and blockchain?

While smart contracts and blockchains often go hand in hand, they are distinct components of the same ecosystem.

• Blockchain: A blockchain is the underlying distributed ledger technology that securely records transactions across a decentralized network. It provides the infrastructure that supports smart contract development and execution.
• Smart Contracts: These are programmable layers on top of the blockchain. They enforce terms autonomously and are triggered when certain conditions are met.

In simpler terms, if blockchain is the highway, smart contracts are the self-driving cars that navigate it.

Do all blockchains use smart contracts?

Not all blockchains are designed to support smart contracts.

• Ethereum Blockchain: Known as the pioneer of smart contract development, Ethereum provides a robust platform for creating and executing complex smart contracts using languages like Solidity.
• Bitcoin Smart Contracts: While Bitcoin supports basic digital agreements through technologies like Script, it lacks the flexibility of Ethereum for running decentralized applications or complex processes.

As more blockchains evolve, some prioritize smart contract functionality, while others focus on their core purposes, such as digital currency transfers.

Pros and cons

Pros

1. Automation: Contracts execute automatically, saving time and reducing reliance on intermediaries.
2. Security: Stored on a blockchain, smart contract code is tamper-proof and transparent.
3. Cost Efficiency: By eliminating middlemen, businesses save money on fees and administrative costs.
4. Accuracy: Reduced human error ensures fewer mistakes and disputes.
5. Trust: Participants trust the system because the contract’s code enforces the rules.

Cons

1. Irreversibility: Errors in the contract code can’t be easily corrected once deployed.
2. Legal Ambiguity: These contracts may lack enforceability under traditional contract law, raising concerns for certain agreements.
3. Complexity: Developing secure, complex contracts requires specialized knowledge, which can be costly.
4. Security Risks: Vulnerabilities in computer code can be exploited, leading to potential losses for users.

While blockchain smart contracts offer a revolutionary alternative to traditional agreements, their limitations highlight the importance of careful planning and execution.

So…how does this help DeSci?

In the world of Decentralized Science (DeSci), smart contracts are emerging as a game-changing technology. DeSci aims to democratize scientific research, funding, and collaboration by leveraging blockchain technology. Here’s how:

1. Funding Scientific Research

Traditional research funding often involves multiple parties, such as grant agencies or institutions, leading to delays and high administrative overhead. With smart contracts, funding can be automated and transparent. For instance:

• Crowdfunding Science: Researchers can create contracts tied to a project’s milestones. Once predefined goals are met, the funds are released automatically to the research team, ensuring accountability and minimizing misuse.
• Decentralized Autonomous Organizations (DAOs): DeSci projects often involve DAOs, where members pool resources. The contracts are then used to distribute funds based on voting outcomes.

2. Data Sharing and Ownership

Scientific data is often locked behind paywalls or proprietary systems. By using smart contracts, researchers can:

• Grant conditional access to data through digital agreements, ensuring that only approved parties can view or use the data.
• Set terms for data usage, royalties, or credit in a decentralized and automated way, ensuring fair compensation or acknowledgment.

3. Publishing and Peer Review

The peer review and publication process is notoriously slow and biased. Smart contracts can:

• Automate the submission and review process by issuing rewards (e.g., tokens) to reviewers who complete their tasks on time.
• Ensure transparent transactions where researchers maintain ownership of their work and earn royalties from citations or downloads.

4. Reproducibility and Provenance

Blockchain’s distributed ledger – combined with smart contracts – can enhance research transparency:

• Researchers can timestamp experiments and results, ensuring reproducibility and verifying authenticity.
• Each step of an experiment can be logged on a blockchain, providing a traceable and immutable record.

5. Collaborative Innovation

DeSci thrives on global collaboration, and smart contracts enable:

• Open-source contributions: facilitate fair sharing of royalties or patents among contributors to a shared research project.
• Automated agreements: create a vehicle for intellectual property rights, reducing disputes and accelerating innovation.

The Promise of Smart Contracts in DeSci

Smart contracts empower the DeSci movement by addressing systemic inefficiencies in the current scientific ecosystem. By automating complex processes, reducing reliance on centralized entities, and ensuring trust between researchers, funders, and the public, blockchain offers a pathway to more equitable and transparent science.

The takeaway

Smart contracts represent a fundamental shift in how we think about agreements and transactions. By combining the precision of computer programs with the trust and transparency of blockchain technology, they empower businesses and individuals to operate more efficiently, securely, and independently.

Although challenges like legal ambiguity and code vulnerabilities remain, the potential of smart contracts in fields such as real estate, finance, and supply chain management is undeniable. As more industries embrace decentralized applications, this innovation is poised to transform our digital and physical economies.

The future of digital agreements is unfolding before us — and it’s undeniably smart.