What Are Smart Contracts?

What Are Smart Contracts?

Smart contracts are automated contracts that work according to predefined regulations and conditions embedded in their writing code.  They are based on blockchain with the goal of executing agreement terms without the interference of a third-party. They perform tasks once specified criteria are fulfilled, offering security, trust, and transparency among the users.

Sitting at the heart of smart contracts are the terms and conditions that define their functions. Once two or more parties jointly set the terms of a contract and launch it, the codes are automatically executed to verify requirements and begin operations like transferring funds or releasing assets.

In the decentralized world, smart contracts are applied in different functions, including voting systems, building decentralized apps, supply chain oversight, and other financial tasks. Apart from being efficient and cost-effective, smart contracts offer many benefits, which are discussed in this article, alongside some common risks.

Benefits Of Smart Contracts

Smart contracts offer cryptocurrency developers and users a lot of benefits, some of which are listed below:

  • Trust and Transparency: the mechanism of smart contracts is guided by specific and predefined protocols that eradicate the need for central authority. The codes and contrast terminologies implemented can be validated on the blockchain, promoting trust among users.
  • Security: the tamper-proof and immutable features of smart contracts make them formidable for unauthorized personnel, criminal schemes, and frauds, making them safe and secure.
  • Eradicates Intermediaries: The smart contracts concept eliminates the role of third parties and central authorities, thereby cutting down costs and speeding up transaction processes.
  • Changeless Recordkeeping: Transaction and contract details are recorded on blockchain ledgers, which makes them resistant to changes or tampering. This feature is especially good for compliance, dispute resolution, and auditing functions.
  • Precision and Accuracy: smart contract functions are always accurate and precise as they implement automated execution to avoid misinterpretation or errors, making it more reliable to enforce agreement terms between parties.
  • Enhanced Privacy: blockchain protocol promotes transparency; however, smart contracts enable developers to keep some sensitive data private while maintaining its transparency nature. In other words, smart contracts create a balance between transparency and privacy.
  • Cost-Efficient & Speedy Transactions: eradicating central authorities drastically reduces the number of paperwork, manual oversight, and administrative costs. Consequently, transactions on smart contracts are cheaper, especially for high-frequency processes. In addition, the fewer pathways make transactions faster.
  • Worldwide Accessibility: as long as you have an active internet connection, you can access smart contracts from anywhere in the world’s four corners. This makes them suitable for seamless cross-border transactions.
  • Automatic Rules Compliance: the financial laws of jurisdictions are embedded in the codes of smart contracts such that they automatically operate in compliance with those rules. This helps to reduce compliance risks and issues.

Smart Contracts Risks

Beyond the fantastic benefits that smart contracts offer, there are some risks they pose that investors need to consider; they include:

  • Oracle Risks: oracles are external data sources that smart contracts rely on to perform functions related to real-world data or events. Oracles can present a single error point, which can lead to wrong contract outcomes or data manipulation.
  • CyberTheft Risks: codes are the core of smart contracts, and once hackers find a weak spot in a smart contract code, they can breach the platform and explore it to siphon customers’ sensitive details or funds.
  • Unclear Regulation: as earlier stated, smart contracts work on predefined laws embedded in their code. However, its automated agreements may not agree with new regulations in the jurisdiction, which can cause regulations compliance issues.
  • Private Keys Loss: smart contracts give users the responsibility of keeping their private keys, which they use to access their services. You may permanently lose access to your account if you lose your private keys


Like many other decentralized products, smart contracts offer huge potential that helps financial entities, both private and institutional, to improve their services and operations. However, understanding the risks smart contracts pose and balancing them with their benefits would help developers and users determine what utility case each smart contract would have.

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Jesse Rosenbalm
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Jesse Rosenbalm

Jesse Rosenbalm stands out in the crypto journalism realm, seamlessly blending intricate blockchain concepts with accessible prose. Known for his deep dives and accurate forecasting, Jesse's articles are a must-read for both novices and experts. As crypto trends shift, his insightful writings remain a beacon in the digital currency space.

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