Smart Contracts: What They Are and What to Know

Key takeaways

A smart contract is a self-executing digital contract that developers build, deploy, and store on a blockchain. Here are some important facts to know:

• Smart contracts self-execute when conditions within the contract are met. For example, when you receive payment or delivery of goods.

• Smart contracts can be legally binding, assuming they meet certain essential criteria, in a manner similar to any other contract. However, considerable legal discussion is ongoing regarding the subject.

• You can write smart contracts using a range of programming languages, from popular options, like JavaScript and C++, to languages that are specifically designed for smart contract development, such as Solidity. 

Learn how smart contracts are reshaping how developers create and execute digital agreements. Then, to better understand how to use smart contracts, IBM’s Full-Stack JavaScript Developer Professional Certificate is a good place to start. It offers practical programming skills that can help support your path toward smart contract development.

What is a smart contract?

A smart contract is an automated digital contract. It’s built on a blockchain and self-executes when the terms and conditions of a transaction are met. This may include a series of actions that trigger the next phase of the contract to execute. The blockchain records the details of smart contracts, which are permanent and traceable, making them highly reliable as nothing can alter them. You can implement smart contracts quickly and efficiently, without the input of an intermediary. 

How smart contracts work

Smart contracts work by a series of coded computer processes that stipulate preconditioned outcomes of an event and trigger an action when terms are met. For example, a payment is triggered after a party receives a delivery of goods. 

To issue a smart contract, both parties must agree on the actions that trigger the smart contract to execute. This might involve multiple stages. Once both parties agree, a developer can then program the smart contract to enforce the terms. 

What is the main advantage of a smart contract?

Smart contracts have several advantages, with an important one being that transactions don’t require an intermediary because they are self-executing. This provides further advantages of reducing costs and saving time, as well as improving security, as a blockchain ledger cannot be modified.

What industries use smart contracts?

The cryptocurrency and financial space use smart contracts widely, but you’ll find a range of mainstream industries are implementing smart contracts into their processes. Examples include:

• Retail

• Real estate

• Health care

• Supply chain management

• Art and entertainment

• Insurance

Common smart contract use cases

You’ll find the use of smart contracts in many scenarios, from buying property to borrowing money to automating billing. Some common real-life examples include:

• Taking out a loan: When applying for a loan, you must complete forms and offer some collateral in the form of an asset, for instance, in case you are unable to make the repayments. Businesses might program a smart contract to execute once a client misses a set number of payments, liquidating the assets. 

• Insurance activation: Insurance providers might use smart contracts to activate policies once specific criteria are met. For example, the authorization of a medical procedure triggers activation of insurance coverage.

• Transportation rental: Vehicle and bike rental companies can use smart contracts to allow you to collect and return your transportation. The bike unlocks when you pay your deposit, and the deposit is automatically returned to you when you return your bike to a rental point. Likewise, a consumer who wants to rent a car may be able to do so through a smart contract system. 

• Purchasing NFTs: Non-fungible tokens (NFTs) are a type of digital asset that utilizes smart contracts to enable the buying, selling, and trading of unique items, such as art and documents them on the blockchain. 

• Real estate: Smart contracts are common in real estate as a way to return security deposits when a tenant vacates a rental property and returns the keys, and the property undergoes an inspection.

Creating and auditing smart contracts

Creating and auditing smart contracts requires specialist skills, usually undertaken by smart contract developers or blockchain developers. Smart contract development requires the ability to use specific coding languages, such as Solidity, to build smart contracts and other decentralized applications, which you store on the blockchain. 

An important part of smart contract development is auditing and testing to ensure maximum security. You must check that the smart contracts you deploy are not vulnerable to breaches due to weak code. They must also comply with GDPR and other industry standards. Developers encode blockchain transactions to heighten security and make it more difficult for hackers to manipulate.

What language are smart contracts written in?

You can use a range of programming languages to build smart contracts, from those designed especially for this purpose, such as Solidity, to more general languages like C++. Popular languages include:

• Solidity: Solidity is likely the most popular language for creating smart contracts, as it was designed for this purpose and works specifically with the Ethereum and other compatible blockchains. 

• C++: C++ is compatible with Windows, Linux, macOS, and iOS, making it a popular choice for smart contract developers. 

• Rust: Rust is another programming language specific to decentralized applications (dApps), including smart contracts, and is the main programming language for use on the Solana blockchain. 

• Golang: Golang is Google’s open-source programming language. Popular for smart contract development because of its parallel processing feature, it allows multiple processes to run at the same time. 

• JavaScript: JavaScript is a popular, user-friendly, object-oriented programming language, well-suited for developers making dApps for deploying smart contracts. 

Is Bitcoin a smart contract?

Bitcoin is not a smart contract; it is a type of cryptocurrency. A smart contract, by contrast, is an agreement documented on the blockchain. Bitcoin can support smart contracts in that you can write a smart contract on the Bitcoin blockchain. Bitcoin smart contracts are a simpler version of smart contracts written on Ethereum.

Legal aspects: Are smart contracts legally binding?

As with any type of contract, a smart contract can be legally binding provided it meets certain conditions. A benefit of a smart contract is that it is highly reliable, as you don’t need an intermediary, and the information is encrypted, reducing the possibility of information being tampered with. 

However, the wide range of smart contract purposes and outlines has some people asking questions about their reliability and legal enforceability. For your smart contract to be legally binding, consider meeting the following guidelines:

• One or both parties must offer something as part of the agreement, and both must accept. As a result, both parties must gain something of value. 

• Everything in the contract must not break any laws, such as activities related to fraud or the dark web, and must be in line with industry guidelines.

• All parties must sign the contract using an e-signature.

Explore our free resources for smart contract development

If you’re interested in learning more about programming or online security, start by subscribing to Career Chat. You can also access some more of our free resources: 

Watch on YouTube: Ethereum Blockchain: Smart Contracts 

Hear from an expert: Blockchain Basics: Practitioner Perspective

Bookmark for later: Cybersecurity Glossary: Key Terms & Definitions 

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