The Perfect Beginner’s Guide on Smart Contracts on Blockchain

The Perfect Beginner’s Guide on Smart Contracts on Blockchain

smart contracts on blockchain

It’s 2021 – even if you are not familiar with blockchain you are likely to have heard about Ethereum. This is the second-largest cryptocurrency with a gigantic market cap of over $351 billion, as of 09/10/2021. To fully comprehend Ethereum, you need to properly understand smart contracts on blockchain. This is exactly what I will […]

It’s 2021 – even if you are not familiar with blockchain you are likely to have heard about Ethereum. This is the second-largest cryptocurrency with a gigantic market cap of over $351 billion, as of 09/10/2021. To fully comprehend Ethereum, you need to properly understand smart contracts on blockchain. This is exactly what I will be taking you through in this article.

Apart from being a currency, Ethereum is also a platform on which other blockchain applications can be built. This platform uses a currency called Ether, which is used to facilitate transactions.

The functioning of the Ethereum blockchain is similar to that of the Bitcoin blockchain. It is a network of nodes/computers that run software that validates transactions on the platform. 

You can think of Ether as fuel. In the same way, you need diesel or gasoline for your car, you need Ether to run the applications and smart contracts on the Ethereum blockchain.

It is highly unlikely that you will miss Ethereum in any of the crypto exchange platforms out there. Because of this popularity, the question ‘What are smart contracts on blockchain?’ has become one of the most searched questions in the space of cryptocurrencies, lately.

So, what are smart contracts on blockchain? Well, let’s take a dive and explore.

What You’re Going to Find in This Guide

This guide aims to assist you to understand what a smart contract is all about and how they work.

I’m aware that “smart contracts on blockchain” can appear to be confusing at first. But once I break it down, you’ll notice that they are not as complicated as you thought them to be.

Before we delve into the more technical stuff, it’s critical to dig into the history of smart contracts on blockchain. Understanding why and how smart contracts were created makes it more comfortable to understand where it fits in the blockchain world.

When were Smart Contracts on Blockchain Invented?

Smart contracts were invented in the year 1994 by a cryptographer named Nick Szabo. He pioneered the idea of recording contracts in the form of computer codes. These contracts would then be activated automatically when certain terms are met. This idea stood a chance of eliminating the need for trusted third-party entities such as banks.

But, how is it possible? – well, the need for a trusted third party to secure your transactions won’t be there. As a substitute, the transactions or smart contracts on blockchain are self-executed on a safe and trusted network that is run entirely by computers.

smart contracts on blockchain

Cool idea, huh? Nick spent many years working on this idea and even penned down a book called “Smart Contracts: Building Blocks for Digital Free Markets”. The challenge he faced in making his idea a reality was that blockchain technology was not in existence back in 1884.

In 2009, Bitcoin launched the use of blockchain technology for the first time. Six years later, an intelligent young man called Vitalik Buterin founded Ethereum which introduced the use of smart contracts for the first time.

What are Smart Contracts on Blockchain?

Knowing what smart contracts on blockchain are all about is not sufficient. Remembering the information given is important. To help you remember this information, I have summarized three key points that you should pay attention to and try not to forget.

A smart contract is an agreement or consensus between two individuals that is stored in form of a computer code. They operate on blockchain and are accessible to the public. Also, they cannot be altered or changed.

Blockchain processes all the transactions that are carried out in smart contracts. This implies that they can be sent spontaneously without needing a third party.

The transactions can only be completed once the terms of an agreement are met.

How Do Smart Contracts on Blockchain Work?

Well, let’s now take a look at how smart contracts on blockchain work.

To better understand how they work, we first begin by looking at how they are used:

Let’s imagine that Cosmas wants to buy John’s car. A smart contract is used to design an agreement on the Ethereum blockchain. The smart contract has an agreement between Cosmas and John.

Simply put, the agreement will be something like this: “WHEN Cosmas pays John 400 Ether, THEN Cosmas will receive ownership of the car”.

This smart contract cannot be altered once it has been put in place. This means Cosmas can feel safe and comfortable to pay John 400 Ether for the car.

If there was no smart contract, in this case, Cosmas and John would have to incur expenses in paying third-party companies to facilitate the ownership transfer process.

This sounds great, right? This is just one among many examples of how smart contracts are being used.

As stated before, smart contracts run on blockchain technology. Because of this technology, it is possible to decentralize smart contracts so as the make them trustless and fair. To decentralize smart contracts means to make them not be under the control of a single central party such as a broker, bank, or government.

Since blockchain is a public database operated by many computers owned by different individuals, one single individual or company can’t control it.

What are Smart Contracts on Blockchain Currently Being Used For?

As I mentioned earlier, Cosmas and John’s car sale is not the only example of how smart contracts can be used. Any other transaction can use smart contracts- it does not necessarily have to be financial.

Smart contracts are already being used in legal processes, credit authorization, insurance, financial trades and services, and even in crowdfunding agreements (ICOs).

Let’s take at how certain industries are using smart contracts.

  • Health Systems

The need for the safe transfer and storage of data in the health field cannot be overemphasized. Health systems use smart contracts to record and transfer data in a safe manner.

The likes of EncrypGen EncrypGen are already using smart contracts in the medical field. They use smart contracts in safely transferring patient data. It prevents third parties from accessing patient data.

With this, the patients have full access and control of their medical data. In case researchers want to use a patient’s data, they have to pay for it. Moreover, the patient has to consent whether or not they would like to sell their data to them.

  • Insurance Companies           

In 2017, two insurance companies, Axa in France and Atlas Insurance in Malta did a test on the use of smart contracts. They designed prototypes that reimburse airline customers in case their flights were delayed.

Let’s check an example:

Hillary is about to fly from Sydney to Washington. He sends an equivalent of $10 in cryptocurrency to the Atlas Insurance smart contract and shares his flight number. Atlas sends $70 to the smart contract. So, there is $80 in the smart contract. 

If Hillary’s flight is on-time, Atlas is sent $80 from the smart contract. However, if the plane delays, $80 is sent to Hillary from the smart contract. Everything is spontaneous.

This saves lots of money and time. It also implies that Hillary does not have to be worried if Atlas will abide by their side of the bargain – he knows that if the flight delays, the smart contract will automatically send him the compensation ($80).

  • Business Management

Businesses can benefit enormously from smart contracts. Instead of compensating staff to generate payroll, they can utilize smart contracts.

For instance, a business may decide to design a smart contract that states WHEN the date is 30.10.2021, the Business sends Bethwel 4 ETH. This implies Bethwel will always receive his pay on time, and he will never be underpaid. The business saves a lot of money and time because of automation.

  • Governments

Governments can use blockchain to run smart contracts in making voting systems more secure and completely trustless. 

FollowMyVote is an application that uses blockchain technology and smart contracts to protect voters from fraud. When the voting is recorded on the blockchain, it cannot be altered. Once the voting process is over, the smart contract will relay a token to an address that represents the winner of the voting process.

When done in this manner, the chances of rigging are almost nil and the winner will always be a correct reflection of the choice made by the voters.

  • Initial Coin Offerings (ICOs)

If you want to begin a project that uses blockchain technology, you can run it on the Ethereum blockchain, as seen earlier. Nonetheless, you will need money to do this.

Well, how then will you be able to get the money? Let’s find this out by looking at ICOs.

Applications that run on blockchain technology uses a crowdfunding system known as Initial Coin Offering or ICOs. This is made possible by creating a smart contract and an accompanying token for that smart contract. 

Let’s call your token YXZ.

You aim to raise $15,000,000 to begin your project and run your application – Let’s imagine that $15,000,000 is the equivalent of 15,000 Ether. You settle on putting 150,000 YXZ tokens into the smart contract, and that each XYZ token will be an equivalent of 0.1 Ether.

This then means, if all 150,000 XYZ tokens are sold, you will have the 15,000 Ether (150,000 x 0.1=15,000). 

So, in the smart contract, you will pen down something like: IF 0.1 ETH is transferred to the smart contract, THEN the smart contract will send 1 XYZ to the address that sends the 0.1 ETH

Why would people consider purchasing the XYZ token?

The two topmost reasons people purchase tokens from ICOs are:

1. The token can be spent on the application once it is running;

2. When the project gains popularity, the value of the token may increase.

How are Smart Contracts on Blockchain Created?

Multiple blockchain platforms allow the building of smart contracts. These include NEO and Ethereum. The latter is the most widely known choice for developers. Let’s take a look at Ethereum’s smart contracts.

Solidity is Ethereum’s original coding language that is used to develop smart contracts. 


From the examples that I have shared, you can see that smart contracts are already replacing middlemen. 

Therefore, if smart contracts on blockchain meet their purpose, maybe one day we will have a world devoid of middlemen. This would mean saving a lot of money and time.

The potential disadvantage of this is that people may lose their jobs. A middle man is not a machine, but a real person, with families or defendants to feed and take care of. 

So, from the information shared, you can see that smart contracts can better the world we live in. It can reduce delays, fraud, and the overall expenses incurred in many things. Nonetheless, as technological advancement takes place, the need for certain jobs gets done away with. 

Now that you are done reading this guide, you should feel at ease responding to the great question: ‘What are smart contracts on blockchain?’

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