Understanding how smart contracts work

4 May 2018

More than 20 years ago Nick Szabo, a computer scientist, legal scholar and cryptographer, came to understand that the decentralized ledgers have a great potential and may be used for creating smart contracts with self-execution protocol. In the format of blockchain technologies contracts and agreements may be converted into the digital code, stored and duplicated within the system, which also ensures the control of its performance. In this post we talk about smart contracts and how we can use them.

Concept overview

Parties to deals formalized as smart contracts may exchange funds, stocks and other valuable things without the need to use the services of intermediary agents or agencies, while ensuring transparency and conflict-free interaction. In the context of conventional relations, parties have to render to the attorney firms or notaries for producing a document. Smart contracts enable direct interaction and access to required works or services, as they feature the same binding force as traditional contracts and may enforce obligations on the contracting parties.

In a simple example, the parties agree to sell or purchase some item for a given amount, and enter into a deal through a smart contract that has a fixed date for execution. The principle of the smart contract is based on the ‘If-Then’ premise, which means that the contract will undoubtedly be fairly performed if either party complies with its obligations in good faith. Thus, if a paying party makes payment, the goods or services will definitely be delivered, or if a provider first sends the goods or delivers a service, it will definitely be paid. The contract is viewed by many parties and the code cannot be interfered or tampered. Below are just some of multiple use cases for smart contracts.


One of the fields, where smart contracts are frequently used is a supply chain. With smart contracts suppliers and their customers may trace the whole process of delivery from the factory to the ultimate destination in a transparent and reliable way. Dedicated devices used for smart contract control and performance may record the location data in the blockchain, where a smart contract is created, enabling the parties to monitor and supervise the movement. In case the delivery is delayed at the customs point, the parties will stay updated.


Smart contracts also substantially facilitate the relationship between the insurance companies and insured parties, as they work independently without the interruption of human staff, thus eliminating a long series of paperwork and bureaucratic acrimony. Input data in the smart contract may provide for various natural disasters, including earthquakes. When an insurance event occurs, the input data are updated accordingly. The claim process in this case completes autonomously and hassle-free, bringing the payout to an insured person without delays.

For instance, when you pay $10 for a policy to insure your air flight, and the insurer pays $90 to the smart contract, the money are kept until one of the two conditions are met: if the flight is on time, the smart contract sends the money to an insurance company, and if the flight is delayed the money is sent to an affected insured party.

Real estate

Smart contracts streamline the process of entering into and performing the deals involving real estate. There is a number of housing agencies and firms offering their services with the use of smart contracts. Propy is one of the first startups to adopt the technology. The first transaction at Propy was made last September and included the purchase of an apartment for $60 thousand.

Smart contracts in the real estate industry works this way: a buyer may reserve some property by paying, let’s say, $10 thousand to the smart contract. If the seller declines the deal, the money will be automatically returned to the buyer. The entire workflow and signature procedures are handled on a remote basis using dedicated applications and digital resources.

At a later stage the process is legalized by corresponding parties, such as money transfer companies and authorities for ensuring the legal status of the transaction.

Understanding how smart contracts work

Apart from the abovementioned categories, smart contracts are successfully practiced today by minor and large businesses in the area of intellectual property, healthcare, pharmacy, employment, finance trading and more. Smart contract ensure autonomous operation, transparency, control of numerous parties, who see the information in the blockchain, risk and fraud prevention, and faultless performance.

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