Smart Contracts 101: What They Are And Why You Need Them

By TechDogs Editorial Team

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Overview

Recently, we rewatched the iconic movie, ‘Willy Wonka and the Chocolate Factory’. What a watch!

However, we noticed a different aspect that we missed altogether the first time. When we consume content, we focus on the technology (we live and breathe tech!). So, we couldn’t help but view the movie through that lens!

So, what did we realize? That contract law plays a huge role in this movie. The moment the five ‘lucky’ children enter the factory, Wonka has them sign a contract. The adults are instantly suspicious of the contract and raise the argument that they need to read it before they sign it. To this, he says “Eh, if you don't sign it, you can't come in.” The children don’t see the perils and instantly agree to it and are let loose in the factory and the rest is history.

By the end of the movie, Charlie does not receive his reward as the contract is riddled with “All those Latin words! All those hereinbefores!” We understand that reading and grasping every clause in contracts can be painful but is there a better way? Can contracts be ‘smart’?

The answer is yes. Let’s find out how!

Modern entrepreneurs are harnessing the growth of technologies such as DeFi, blockchain and Web 3.0 to enhance their financial flexibility. We mean, most businesses are looking at newer ways to safeguard their interests and complete deals such that they do not require traditional third-party interjections and heavy commission fees. How, you ask?

Enter Smart Contracts - a crazy innovation in the world of business. With its market expected to expand to nearly USD 1.08 billion by 2030 (from barely USD 190 million in 2022), organizations in the near future will not need third-party entities to oversee their contracts, as smart contracts are entirely self-executing. Imagine the time that will be saved - that's why they're "smart" contracts!

At TechDogs, we always want to explore unique ways to shake the traditional system and smart contracts are one such approach in the modern tech-enabled era. Read on!

What Are Smart Contracts And Why Are They So ‘Smart’?

In very simple terms, a smart contract is a decentralized computer program running on a blockchain network that automatically and deterministically executes agreements based on predefined conditions. What makes it smart, you ask?

Well, each smart contract consists of code specifying predetermined conditions that, when met, trigger outcomes.

It runs on a decentralized blockchain network instead of a centralized server and allows multiple parties to come to a shared result in an accurate, timely and tamper-proof manner. Smart Contracts primarily use the Ethereum blockchain and are not controlled by a user, instead, they are deployed to the network and run as programmed. These contracts are self-executing, meaning no person must sign along a dotted line or push a button. Instead, these agreements between buyer and seller (or whatever parties are involved) are written directly into the lines of code.

So, assume that Charlie insisted on a transparent contract and not the tricky jargon-filled contract. It would have been infinitely difficult for Willy to pull this sly move off. He’s gonna hate this new world!
That’s great, but how does it even work?

Here’s How Smart Contracts Work, Mr Wonka!

Anyone can write a smart contract and deploy it to the network. Yes, it’s that accessible!

You just need to learn how to code in a smart contract language and have enough ETH (Ethereum token or other token native to the blockchain being used) to deploy your smart contract. As they are tamper-proof programs, they work on an initiation of ‘what ifs’: “if/when x event happens, then execute y action.”

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Moreover, smart contracts can define rules and automatically enforce them via the programmed code. They can define exactly how users will be able to interact with it, including who can interact with the smart contract, at what times and what inputs would result in what outputs. Smart contracts cannot be deleted and hence, interactions with them are irreversible.

While Willy Wonka would hate this technology, here’s how you can gain from it!

How Can You Benefit From Smart Contracts?

There are several advantages of using smart contracts and some of them include:

Enhanced Trust

Most traditional contract agreements involve parties that don’t know or even trust each other. Smart contracts can be hosted and executed by the two parties on agreeable terms, which can dramatically enhance trust and safety.
Better Security

Smart contracts can increase the security as contracts are indelible and cannot be tampered with. This reduces the likelihood of contract explosion or other risks.
Reduced Human Errors

Since smart contracts are programmatic, they help eliminate the need for third-party verification or any human oversight. This reduces the chances of errors in the contract introduced by human error.
Simplifies Processes

Using smart contracts reduces legal complexities, automates contractual paperwork and avoid reduces form-filling as a decentralized network-based contract can makes every aspect of the contract more open and accessible.
Secure Back-up

Smart Contracts also reduce the risk of fraud and other unethical practices, as they have built-in backup systems that can withstand cyber-attacks and other threat.

TechDogs-"How Can You Benefit From Smart Contracts?"-"A GIF Of Willy Wonka"

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Yup, we agree – and we bet the newer Willy Wonka pictured above agrees with us. After all, modern businesses must use smart contracts – and to do so, they need to know its types. Read on!

What Are The Types Of Smart Contracts You May Ask?

We love answering smart questions. Let’s explore the types of smart contracts!

Smart Legal Contract

Guaranteed by law, these smart contracts adhere to the structure of legal contracts: “If this happens and then this will happen.” As smart contracts reside on blockchain and are unchangeable, judicial or legal smart contracts offer greater transparency than traditional documents among contracting entities. Such smart contracts are based on a series of events and failure to adhere may lead to legal repercussions.
Decentralized Autonomous Organizations (DAOs)

These smart contracts are created by democratic, blockchain-governed organizations with a shared objective that is collectively controlled. No executives or presidents exist, hence the factors embedded within the contract’s code regulate how the organization’s funds are allocated and distributed.
Application Logic Contracts (ALCs)

These are application-based codes that sync with other contracts enabling IoT or blockchain regulation. Unlike the other types of smart contracts, these are not signed between humans or organizations but between machines and/or other existing contracts.

Whilst they are all smart, you can choose the smartest one that works for your business need!

The Bottom Line

So, what do you think, Willy Wonka? Still want to use traditional, paper-and-pen contracts?

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That’s right! Smart contracts have the potential to eliminate tedious and cumbersome paperwork and provide a fresh new outlook on how legal formalities take place. According to leading research firms, smart contract adoption will show a significant rise in the coming years – and now you know why! Smart contracts will soon be crucial for organizations and will replace third parties for drawing and verifying contracts. Who knows, perhaps the entire process will be decentralized soon!

Frequently Asked Questions

What Are Smart Contracts And Why Are They Considered 'Smart'?

Smart contracts are decentralized computer programs that run on a blockchain network, automatically executing agreements based on predefined conditions. Their intelligence lies in their ability to execute predetermined actions when specific conditions are met. They operate on a decentralized blockchain, enabling accurate, tamper-proof and timely execution without the need for intermediaries.

How Do Smart Contracts Work?

Smart contracts work by deploying code onto a blockchain network, which executes predefined actions based on specified conditions. Users can create and deploy contracts by coding in a smart contract language and providing the necessary tokens for deployment. These contracts define rules and enforce them automatically through programmed code, ensuring irreversible interactions and eliminating the need for human oversight.

What Are The Benefits Of Using Smart Contracts?

There are several advantages to using smart contracts:

Enhanced trust: Smart contracts enable parties to execute agreements on agreeable terms, enhancing trust and safety.
Better security: Contracts stored on the blockchain are tamper-proof, reducing the risk of tampering or contract exploitation.
Reduced human errors: Programmatic execution eliminates the need for third-party verification, reducing errors introduced by human oversight.
Simplified processes: Smart contracts streamline contractual paperwork, reducing legal complexities and making contracts more accessible.

Secure backup: Built-in backup systems protect against fraud and cyber-attacks, ensuring the integrity of contracts.

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Smart Contracts Smart Contract Platforms Contract Platforms Blockchain Technology Blockchain Network Supply Chain Distributed Ledger

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