Written by Shivashish Yadav on   -  5 min read

What is Smart Contract and how does it work?


Since cryptocurrencies, smart contracts have also become very popular, you must have heard the term smart contract a lot, and you must have come to your mind that what is a smart contract? How does it work? Why are people talking so much about it? What is so special about it?

Smart Contract is a computer program in which many contracts, agreements, terms and conditions are made with the help of coding, you can also call it a digital contract, it is a contract between a buyer and a seller, which is done with the help of coding. It is created, this smart contract is automatically run and controlled with the help of Blockchain technology.

The main purpose of the smart contract is to remove the third party from the middle, once the smart contract is created, no one is required to run it, according to the terms and conditions, the smart contract continues to run according to the code that will be created.

How do Smart Contracts work?

The smart contract was first mentioned in 1996 by Nick Szabo, a computer scientist and cryptographer, who used it on his own digital currency called "Bit Gold", but it could not be so popular because its technology was way ahead of its time.

Smart contracts were re-used in 2013 by Vitalik Buterin, the inventor of the Ethereum cryptocurrency, who is a big name in the cryptocurrency world today, ever since smart contracts became more popular. To create a smart contract, a different type of programming language is required, which is named Solidity.

Solidity language is almost similar to JavaScript, if you know JavaScript language, then you can understand Solidity language easily and can also create smart contracts.

The way there are simple contracts and agreements, in the same way there are smart contracts, but in those simple contracts, we need the help of third parties, like if you want to sell your house to someone, then you will need a property dealer for that. A lawyer will be required to prepare the document, in which a lot of your time and money are wasted.

In normal contracts, we rely on a third party. Maybe that third party cheats you, or he may manipulate the contract, which happens often. But in the same smart contract, no third party is required and whatever transaction is processed in it is quick. The smart contract, once created, cannot be changed.

Due to which it is impossible to be fraud and because of being in the blockchain, it is also very difficult to hack the smart contract, so it is considered quite secure. The information of any transaction between two parties through a smart contract is kept in the blockchain, which anyone can see and find out who is the owner of the property on which this transaction has taken place.

Let's say two people use a smart contract for bitcoin transaction, first of all the transaction requires a digital signature of both the persons, when one person sends money, it is stored in a secure place inside smart contract. And that money is not received by the second person until he sends the bitcoin. If he does not send the bitcoin, then the money will be returned to the first person.

The transaction process is not completed until the conditions written inside the smart contract are fulfilled, but as soon as both the parties fulfill their respective conditions, the transaction is completed at the same time. This is how smart contracts work.

How to make a Smart Contract?

The most famous platform for creating smart contracts is Ethereum, which has built its own programming language Solidity to create smart contracts. So far, many smart contracts have been built on Ethereum. This has made it easier to create smart contracts, due to which most people use Ethereum to create smart contracts.

However, it also has a lot of flaws. Ethereum's network is working to rectify this flaw, with transaction fees that are higher than other cryptocurrency platforms.

Apart from Ethereum, there are many such networks where you can create smart contracts such as Hyperledger Fabric, Nem, Stellar and Cardano, etc.

Advantages and Disadvantages of Smart Contract

Benefits of Smart Contract

  • The first advantage of a smart contract is that it has removed the third party from the middle, which saves you a lot of time and money.

  • Once on the smart contract, the terms and conditions, agreements have to be made by coding. After that, it does all the work itself, no one is needed to run it.

  • While creating a simple contract takes a lot of time, whereas in a smart contract everything happens faster with the help of computer programming.

  • Smart contract is stored in blockchain technology, due to which it is impossible to hack or change. The same common contract can also be stolen or lost or can be torn, and the biggest thing is that they can be changed easily.

Disadvantages of Smart Contract

  • The biggest disadvantage of a smart contract is that if the contract is not created properly and any loophole is left in it, then hackers can easily hack the smart contract and steal all the data and money.

  • If some mistake happens in the contract while creating it, then that mistake cannot be corrected again because the smart contract is created in such a way that once it is made, it cannot be changed back.

  • If anything goes wrong while transacting in the smart contract, then no one will help you because it is not under the control of the government or any third party, so all the responsibility will be yours.

  • There are no proper rules and regulations regarding smart contracts, so many people are afraid to use them.