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Smart Contracts. Understanding Smart Contracts and why you should use them

Smart Contracts. Understanding Smart Contracts and why you should use them

Understanding Smart Contracts. Why you should use them?

Cryptocurrencies have gained prominence not only in financial markets but in other industries as well. This happened especially due to many innovation aspects it brings to the table. This popularization has brought with it the spread of terms such as blockchain and smart contracts.

Blockchain technology has gained notoriety because of its security and transparency involving transactions of digital currency.

Smart contracts, on the other hand, represent one of the key elements of many innovations that blockchain technology prides itself in.

This article delves further into this topic, to help you understand how smart contracts can make an effective contribution to your business. In whatever industry this may be.
Continue reading to broaden your horizons!

In this article you will learn more about:

  1. What are smart contracts?
  2. The relationship between a smart contract and cryptocurrency.
  3. Benefits of smart contracts.

1. What are smart contracts?

Smart contracts are known as a business rule based on computational code. Although this definition might seem complex, it’s not too difficult to understand how they work. Let’s break it down.

The main objective of a smart contract is to aid in the exchange of money, assets and other items of value in a transparent way whilst avoiding a middleman.

When talking about smart contracts, it refers to the possibility of definition and validation of business rules in a fully automated way.

For example, think of a financial contract in which an individual assumes the obligation to pay another party the amount of $5,000.00 divided into 5 monthly installments of $1,000.00. Traditionally, this contract would be drafted via a printed document, signed by both parties involved, and possibly include two witnesses.

The contract would declare all rules and obligations such as deadlines and other rules for payment, including the contractual forecast in case of default.

In a smart contract, all steps – from the signature of those involved to sending and receiving the values – are done in a completely digital manner. Without paper contracts or signatures, and in an automated way.

2. The relationship between a smart contract and cryptocurrency.

Once the user of digital coins has a pair of cryptographic keys, he is able to sign virtual currency transactions addressed to his destination wallet. In addition, the possibility to define rules for movement of funds is also present.

Technically, smart contracts are lines of code that allow you to represent terms of a contractual relationship.

Users are still getting familiar with this new technology and companies are learning about this concept and how they can implement it in their business model.

Since cryptocurrencies are a decentralized technology (without the interference of banks or government institutions), smart contracts make it possible to approve obligations without the need for an intermediary. In this way, it ensures compliance with what has been agreed upon by both parties.

3. Benefits of smart contracts.

You may be wondering, what are the advantages of smart contracts? And how will I personally benefit from them, as well as my company?

As you can see, smart contracts are an evolution in how bonds can be agreed upon. Hence, they bring several advantages to their users such as;

Lower cost

The first advantage of smart contracts is the financial impact. As the intervention of people in this type of contract is considerably low, the costs are also reduced since there is no need to name – and pay – a third intermediary.

The true legitimacy of a smart contract has been debated among legal professionals as to how truly smart they are and the possibility of completely eliminating the need of a professional.

It is believed that it may not fully reach this point. However, smart contracts are a technology aiming to reduce expenses by allowing development of new applications not held back by traditional means.

Increased security

According to some professionals, smart contracts offer more security than physical contracts. The argument is that the former are bound to an exact science (computational codes), while traditional, physical contracts are open to interpretation and argument.

Smart contracts are digital, and developed based on a programming language. They establish the obligations and duties, as well as the consequences of noncompliance with clauses, in the same way physical contracts do.

The difference is that the code of a smart contract can be automatically executed.

Encryption technology also prevents possibility of modifying the terms once set in place, thus minimizing risk of damages and financial losses for parties involved.

More transparency

Smart contracts are fully auditable. This ensures all transactions carried out can be viewed throughout the life of the contract.

This is not possible with physical contracts, which can lead to arguments and even financial losses for the parties involved.

More Accuracy

Since this type of contract is based on Blockchain technology, there is an automation factor in its execution.

Code programming allows contractual relations established between the parties involved to be automatically executed from the moment conditions are met.

In this way, all clauses containing rules, obligations and penalties are applied in an automated fashion, bringing a whole new element of exactness to the entire process.

This reduces occurrence of human error, bringing more confidence in fulfillment of the contract.


Smart contracts are linked to automation. The reduction of errors and discussions pertaining their legality significantly reduces dependence on third parties. This makes all processes faster, bringing efficiency and higher quality to the entire transaction.

The software code of a smart contract automates manual tasks, which implies velocity in the process of business, which translate into benefits for several sectors in a business.

As you can see, smart contracts represent a new solution brought on by Blockchain technology.

Although it is a subject which is debated, they are becoming more popular, and implemented in real life situations and adapted to the needs of other businesses.

Regarding cryptocurrency, it is interesting to see how it has brought new technologies and solutions previously unknown or even nonexistent.

Smart contracts demonstrates how innovation of digital currencies has emerged to contribute to the development of business implementation and technology as a whole.

We hope that our article shed some light on this new emerging technology.

If so, please share this post on social networks and help spread knowledge about cryptocurrency & smart contracts!


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