how smart contract work




Smart contracts use blockchain technology to facilitate the exchange of money, property, information or anything that people deem appropriate to initiate a smart contract for.

The beauty of the decentralized nature of blockchain based peer to peer transactions means that these smart contracts don‘t require anything in the way of a middleman. Traditionally individuals or institutions such as banks and solicitors were required to facilitate legally binding contracts. Smart contracts allow individuals to bypass these costly and often slow middlemen and agree on a contract directly.

Vitalik Buterin defined a smart contract as being “a mechanism involving digital assets and two or more parties, where some or all of the parties put assets in, and assets are automatically redistributed among those parties according to a formula based on certain data that is not known at the time the contract is initiated”.


  • Autonomy      – Decentralized nature of the blockchain contracts underlying these smart      contracts as well as the nature of the contract themselves means no      outside party is required in the process.
  • More      secure – Blockchain technology creates unalterable ledgers which provide      definitive proof of transactions. It also relies on encryption while      operating as a secure peer to peer transaction system.
  • Faster      speeds – Without the need for a middleman, speeds are much faster.
  • Increased      accuracy – Humans make mistakes, smart contracts are designed not to.
  • Cost      savings – Automated process lowers costs significantly.
  • Trust      – Unalterable ledgers mean transactions are set in stone.
  • Backup      – Data storage devices can fail. Smart contracts duplicate all      transactions so that all parties have a record of the transitions. The      likelihood that all parties are going to suffer data storage failures is      practically nonexistent.

So now we‘ve cleared that up let‘s take a look at the top 10 real world examples of smart contracts use cases:



Trade Finance stands to benefit immensely from the introduction of smart contracts. Recently, Santander Innoventures said that it believes that blockchain technology will lead to more than $20 billion worth of savings per year by 2022.

A huge amount of these savings will come from smart contracts automating approval workflows and clearing calculations that at the present time are incredibly labor intensive. Not only will this automation help to reduce work-hours but it will also dramatically reduce errors and the time taken for these calculations to take place.



Nearly every foreseeable industry in the world will be able to use smart contracts to help improve the speed and security of its record keeping. One industry in particular that stands to benefit enormously is the healthcare industry.

Currently, the world‘s healthcare computer systems hold hundreds of millions of patient medical records. Despite the fact that these healthcare organizations have invested huge sums of money on security, current access and storage methods are far more vulnerable to cyber-attacks than their blockchain based equivalents are.

Blockchain technology could allow entire databases of personal health records to be securely encrypted and kept. An added bonus is that the technology also facilitates the use of a private key that means only certain individuals can gain access. Some of other blockchain smart contracts use cases include their use in issuing prescriptions, storing receipts, general stock management, storing test results, and so on.



Smart contracts have two huge uses when it comes to the property market. Firstly, they can be used to record property ownership. Since the use of smart contracts is faster and more cost efficient this makes them a much better alternative to existing systems. It also means that they can be used to record ownership of all types of property from buildings, land to phones and watches.

Within the housing market, smart contracts can remove the need for expensive services such as those provided by lawyers and housing brokers. This new technology also means that for the first time ever, sellers have the ability to handle the transaction completely by themselves.



The property market also stands to benefit from cheaper, faster, and more secure smart contract based  mortgage transactions. Not only will this allow buyers to get into the property quicker but it will also help make the entire process a little less of a headache.

Smart contract mortgages would allow both parties to digitally agree to the sale before then processing the payment. Once this is done, the contract would update the property ownership details to reflect the change of ownership. Since the process would require unique key code authorization on behalf of the original owner, it will make the whole process more secure and reduce instances of fraud.




The insurance industry spends tens of millions of dollars each year on processing claims. Not only that, it actually loses millions of dollars to fraudulent claims too.

Aside from supporting the initial insurance policy, smart contracts could also help improve the process of claim processing in many ways. They could allow error checks and determine payout amounts based on a set of criteria that takes into account the kind of policy that was held by the individual or organization. Once again, reduced processing times, a dramatic reduction in errors, and cheaper costs are among the main benefits.

In the longer term, smart contracts could be used in tandem with Internet of Things enabled vehicles to allow for pay-as-you-go insurance policies and the immediate activation of claims after an accident. Information such as driver license, driving records, accident reports, and policy details could be immediately processed to facilitate speedy payouts that would benefit both parties.


The medical research industry will benefit from similar advantages as the healthcare industry. First of all, highly sensitive data such as patient records could be transferred between departments/research centers after having been securely encrypted via blockchain technology. Since many of the patients participating in medical research have sensitive medical conditions that they often wish to remain private, keeping these records secure is essential.

Likewise, medical research companies have an enormous amount of data which includes test results and new drug formulas that they need to keep safe. These could be secured through the use of smart contracts should they need to divulge any of this information to a third party for any reason. These is but one smart contracts blockchain example that could massively benefit the medical research industry.

7.    VOTING

Allegations of voting fraud occurred as recently as the last U.S presidential elections. Despite using computer systems that, in some cases, cost millions of dollars, fraudsters find increasingly imaginative ways to manipulate them.

Smart contracts are a simple and cost-effective solution to this problem. They can be used to validate a voter‘s identity and record their vote. This information could then be used to initiate an action after all voting had ceased. Since the blocks within a blockchain are impossible to alter once they have been recorded, manipulation of this record would not be possible.


Smart contracts can be used for a whole range of peer-to-peer transactions. This reasoning is what led to the creation of the Ethereum Project and other such companies. Users of all shapes and sizes can use these platforms to create and agree on smart contracts. These contracts then remain active until a set of agreed conditions are met. Once the smart contract is happy that all conditions have been met, it then allows the remaining portion of the agreement to be fulfilled. Typically this is the transfer of money but this isn’t always the case.

So far, smart contracts have been used for everything from launching ICO‘s to selling goods on the internet. Companies are also using smart contracts to secure the services of development teams and other outsources companies.

The possibilities of peer to peer smart contracts are literally endless. Theoretically, they could replace many of the existing roles that are currently fulfilled by currency.



Another exciting use of smart contracts is to keep a ledger regarding the stages of development of a product. Two parties would sign the contract which would activate it. As the agreed upon project was developed, the stages and any other relevant information could be recorded to the smart contract. If the parties had agreed to such things as split payments, then as these milestones were reached, the contract would initiate their release. A huge part of the appeal of smart contracts is their ability to keep information secure and to prove its origins. A company that has invested huge amounts of money into developing a project obviously doesn‘t wish for the information to be stolen. Generally, the only route to justice when information is stolen is a lengthy court process, something which most companies don‘t have the time and money to go through.

When it comes to intellectual property such as ideas, you only need to look as far as the never-ending patent claims between Apple and Samsung to see just how important being able to prove ownership really can be. The list of industries that could benefit from this new technology is huge. Given that smart contracts support and secure product development, the kind of industries involved could range from a small startup to a large tech company such as Microsoft or Amazon.


Supply chains are another area of business that can benefit from blockchain based smart contracts. Internet of Things devices could be used throughout the supply chain to record each step a product takes. Smart contract supply chains could theoretically virtually eliminate in-house theft as managers would be able to trace a missing product back to the exact time and place that it went missing.

On huge supply chains such as those found in large warehouses, these smart contracts would enable managers to see real-time stock levels and the time it takes for products to move through the supply chain. Managers could use this data to adjust stock levels and develop new working practices to improve on delivery times.

For supply chains that operate in several different locations or companies, smart contracts could do all of the above and even initiate automatic reorders and payment for orders already received. Such information as contained in these contracts could also be used to help with determining up and coming busy periods and even which products to stock at different times of the year.

Areas of Application of Smart Contract

When it comes to smart contracts, the number of use cases in industry and everyday life is almost endless. Let us tell you about the most interesting applications and show you how the implementation of smart contracts in business is already changing the world we live in.

Digital Identity

Today, different institutions hold different details about your life – bank records, ownership rights, job details, demographic facts, etc. To collect all this information in one file, you would need to carry a huge pile of papers, references, copies. It’s pretty inconvenient, especially, if you have to pass an identity verification.

Smart contracts solve this problem and allow to keep all the data on one person in one place. Whenever something happens to you, it would be registered on the blockchain to keep your identity holistic. Owing to this, KYC verification would become instant. And your privacy wouldn’t be affected as you are the one to decide which information to disclose.


Don’t you feel annoyed when you’re trying to make a money transfer, and you need to cover a fee, pay a percentage of the sum you send, and then wait for a few days while the transaction is being processed? Even though the modern banking system works rather smoothly, its imperfections are hard to deny.

Smart contracts do not require any intermediaries. Hence, you pay no fees. As there’s no bureaucracy involved, transactions become fast and cheap. Moreover, the transparency guaranteed by the blockchain reduces the possible risks of fraud.

Tax Records

An image of a guy running to a tax office with a pile of paper just to find that it’s closed is a source of endless jokes in American cartoons. But when you are in the shoes of this guy, you’re unlikely to laugh.

Automatic payments triggered by smart contracts would save you from fines and prevent you from committing a crime unintentionally. At the same time, all the data about taxes is recorded on the blockchain and available for everyone who is determined enough to check the database. The transparency of the tax records makes cheating almost impossible.


May you get into a minor car accident, the first thing you would worry about is an insurance payment. If the accident is not your fault, you expect the guilty side to cover repair expenses. But what would you do if this person denies their fault? Your chances of getting a refund are not too inspiring.

May the car be equipped with an IoT device reporting its location, speed, time of the accident, you would have no reasons to worry. In case you’re right, the data on the blockchain would prove your words, and you would get your payment automatically.

Real Estate and Land Titles Recording

Real estate deals, especially, cross-border ones are way too painful for a normal person to handle. You don’t want to get involved in months of legal negotiations, paper signings, and other bureaucratic nuances related to transfers of ownership rights.

With the help of smart contracts, this pain is easy to avoid. The centralized registry of the property would allow you to buy and sell real estate without intermediaries and to pass ownership rights within minutes. In a few clicks, you would find the apartment you want, pay for it, and get the proof you’re the new owner. You don’t even need to meet with the seller.

Supply Chain

When you come to the store to buy seafood, you never know 100% how fresh it is. It might be written that it has just arrived from Denmark. Your options are not too impressive – you may either believe it or not.

Smart contracts combined with IoT devices are about to make a revolution in logistics and supply chain. With their help, tracking of the way products pass before they arrive at the retail spot becomes automatic and transparent. At any given moment, you know where the goods are, in which conditions they’re stored, and when they would arrive. It applies not only to food products. For instance, this technology can be used for tracking retail goods, responsibly sourced coal, oil, gold, etc. Owing to the blockchain, vendors become more trustworthy and the risks of fraud decline.


You come back from work, and a box with the products you need waits near the door. You turn on the TV, and the movie you wanted to watch is already downloaded. Your alarm is about to ring, and your curtains open automatically a second before it. A smart house is no longer a setting for a sci-fi movie, and, due to smart contracts, it becomes more automatic and reliable.

IoT is one of the most inspiring smart contracts examples as it is tightly connected with our daily routines.

Gaming and Gambling

The Internet is full of offers to play online slot machines or to check out new virtual gambling rooms. When you play for free, you don’t care too much whether you win or lose. But when you play for money, you start thinking about payments and ways of getting your winnings.

If a virtual casino adopts smart contracts, you would have no reason to worry: whenever you win you get your reward, whenever you lose you can’t fool the system and keep your money. Gambling becomes transparent and honest. The same algorithm applies to any paid computer game and e-sports.

Authorship and Intellectual Property Rights

Piracy and authorship violations are a big issue within the entertainment industry. Musicians, photographers, writers, and other artists are deprived of their royalties due to the dishonest exploitation of their intellectual property.

Making a transparent registry of authorship on a blockchain is an ambitious example of how smart contracts may improve the current state of affairs. For instance, whenever someone downloads your novel or stock photo, you get a refund automatically.Moreover, your rights are registered securely, and no one would be able to alienate them.

Life Science and Health Care

The profit brought by smart contracts is not only in secure and fast transactions, automatic payments, and enhanced daily routines. Can you believe that such contract may save your life, for instance, prevent a heart attack? Actually, it can.

Let’s say, you wear a health tracking bracelet that registers your heartbeat and blood pressure and transfers this data to a blockchain regularly. When any of the indexes exceeds the norm, a smart contract triggers a notification you receive on your phone. In such way, you will be warned that something goes wrong and you would have enough time to take medicine and prevent a crisis.

Moreover, a blockchain is convenient for secure storage of clinical trials results as it guarantees the privacy of the patients.

Blockchain and the potential to help notoriously difficult industries

Whether you’re starting a new job or buying a new phone, contracts are integral to any official agreement. The sheer volume and complexity of traditional contracts can be overwhelming, involving high administrative costs, dependence on a third party system and often outright confusion. As processes are increasingly digitalised, it’s become necessary to find a way to make reliable, digital business agreements. Enter the smart contract, a computerised protocol which stores and carries out contractual clauses via blockchain. The point is to avoid relying on third party systems, and allow visibility and access for all relevant parties. But what exactly can they be used for?

1. Insurance

Due to a lack of automated administration, it can take months for an insurance claim to be processed and paid. This is as problematic for insurance companies as it is for their customers, leading to admin costs, gluts, and inefficiency. Smart contracts can simplify and streamline the process by automatically triggering a claim when certain events occur. For example, if you lived in an area that was hit by a natural disaster and your house sustained damage, the smart contract would recognise this and begin the claim. Specific details (such as the extent of damage) could be recorded on the blockchain in order to determine the exact amount of compensation. The same series of events would happen following a car accident, or if somebody reported an insured personal device as stolen.

2. Supply chain management

Supply chain management involves the flow of goods from raw material to finished product. Smart contracts can record ownership rights as items move through the supply chain, confirming who is responsible for the product at any given time. This has become far easier using Internet of Things sensors, which track goods from producers to warehouses, from warehouses to manufacturers, and from manufacturers to suppliers. The finished product can be verified at each stage of the delivery process until it reaches the customer. If an item is delayed or lost, the smart contract can be consulted to find out exactly where it should be. If any stakeholder fails to meet the terms of the contract, for instance if a supplier did not send a shipment on time, it would be clear for every party to see. Making supply chains more transparent via smart contracts is helping to smooth out the movement of goods and restore trust in trade.

3. Mortgage loans

The mortgage process is far from simple. The terms of a mortgage agreement, for example, are based on an assessment of the mortgagee’s income, outgoings, credit score and other circumstances. The need to carry out these checks, often through third parties, can make the process lengthy and complicated for both the lender and the mortgagee. Cut out the middle men, however, and parties could deal directly with each other (as well as access all the relevant details in one location). As a general rule, the simpler something is, the cheaper it will be – and through smart contracts, US lenders alone could reportedly save a minimum of $1.5bn.

4. Employment contracts

The relationship between an employee and their employer can be tempestuous, especially if either party fails to meet expectations. By entering into a smart contract, an employee would know exactly what was expected of them, as would the employer. Recording interactions in this way could help to improve fairness in wages or conditions, as any changes to contracts would be recorded. This openness could greatly improve the relationship between employers and their employees. Smart contracts could additionally be used to facilitate wage payments, according to the agreed amount and within a specific time period. Smart contracts could also help to regulate the use of temporary labour, which involves an employer, an agency and a worker. The worker joins the agency and is then hired by an employer. Unfortunately, a lack of transparency has meant that agencies can alter the contract’s terms after workers have already started the job. This could mean shortening or lengthening the contract, changing wage rates or other worker’s rights. It can be difficult for the authorities to detect these changes, but not if a smart contract system is applied.

5. Protecting copyrighted content

Every time that a piece of content is used for commercial purposes, for example a song, the owner of the rights to that song receives a royalty fee in theory. Of course, there are multiple parties involved in creating a song, and it can be hard to work out who owns these rights and who is therefore entitled to payment, plus existing systems do not work well. This has led to confusion over entitlement, no doubt giving some contributors more than they are due to the detriment of others while some receive nothing at all. Smart contracts can ensure that royalties go to the intended recipients by recording ownership rights in a decentralised blockchain system. This could theoretically be applied to any piece of content with a team of contributors.

Smart contracts have many benefits for a wide range of industries, reducing unnecessary costs and time expenditure while enhancing transparency. In theory, they are more efficient and trustworthy than traditional contract law, and are also thought to offer better security as all actions are recorded and verified. However, like paper contracts, they could still experience fraud. Code is not infallible and can be delayed, intercepted and corrupted. As businesses move forward into digital negotiations, an awareness of these risks is integral.