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Fundament of the week – Smart contracts

The term “smart contract” refers to a protocol or software that secures, verifies, or enforces the negotiation or transfer of a contract (or agreement). This can be done in a way that eliminates the need for a real physical contract between people. It goes without saying that the possibilities offered by smart contracts are revolutionary.

Smart contracts usually provide a user interface and often emulate the logic of contractual agreements. Proponents of smart contracts argue that due to this feature, a large part of contractual agreements can be partially or completely self-executing, self-enforcing, or both. Smart contracts have the potential to provide greater security and enforcement at lower costs than traditional law. For example, they allow you to perform trusted transactions without third parties. These transactions are traceable and irreversible. So much for an introduction, let's take a closer look now.

paper contracts as the thing of the past? Figure 1: Smart contracts have the potential to render the old-fashioned paper contracts obsolete (source:

Origin and definition

Smart contracts were described by Nick Szabo in the 1990s. Even then, they were defined as a tool that formalizes and protects computer networks by attaching a network protocol to the user interface. In his groundbreaking paper, Szabo discussed potential applications for smart contracts in various areas - including credit systems, payment processes, and software that helps with managing copyrights. With the invention of Bitcoin in 2009, smart contracts moved a step closer to their real use. However, the real milestone for their use did not come until 2013, when Vitalik Buterin and Gavin Wood introduced the concept of the cryptocurrency Ethereum, which includes the possibility of creating smart contracts in its blockchain. Today, there are many projects that aim to extend smart contracts to the public (eg IBM Hyperledger Fabric, Share & Charge, or Propy).

In the world of cryptocurrencies, a smart contract can be defined, in the simplest of ways, as an application or program running on a blockchain network. Smart contracts are nothing more than digital contracts, which are enforced by a special set of rules without human intervention. These rules are predefined by computer code that is replicated and executed by all nodes operating in the network. Smart contracts created in blockchain networks allow the creation of specific network protocols in which users do not have to trust each other. This means that two parties can commit to themselves through a blockchain without being acquainted or even trusting each other when fulfilling the contractual conditions. After the contract comes into force, each of the parties can be sure that once the terms have been breached by any of them, the terms and conditions will not be met. Smart contracts also eliminate the need to seek help from third parties (intermediaries), which significantly reduces the cost of contracts concluded in this way.

How smart contract works?

In short, a smart contract is a deterministic program. This means that it performs a specific task as soon as the declared conditions therein are met. Smart contracts are basically a set of "if A then B" rules. Despite their name, smart contracts are not smart or legally classified contracts. Each smart contract is really just a piece of code that works thanks to a distributed network of nodes (blockchain).

In the Ethereum smart network, contracts are responsible for performing and managing specific blockchain operations that occur when users (real addresses) enter into specific interactions with each other. Any address that is not a smart contract is called an externally managed account (EOA). Simply put - smart contracts are sorted by computer code and EOAs are controlled by the user. Each of the smart orders in the Ethereum network basically consists of a contract code and two public keys. The first public key is the one provided by the contract creator. The second key represents the contract itself, which serves as its digital identifier. It is also is unique to any smart contract.

The implementation of any contract requires a transaction in the blockchain network. In addition, any smart contract must be opened by the EOA. Regardless of the source that activates the operation of the contract, the first interaction always comes from the EOA (user).

Main features

Smart contracts created in the Ethereum network are most often characterized by the following features:

  • They are
  • scattered
  • . Smart contracts are replicated and distributed to all nodes present in the Ethereum network. The way in which smart contracts are distributed and then concluded is their biggest plus compared to traditional centralized solutions (for example, servers maintaining contract provisions).
  • They are
  • deterministic
  • . Smart contracts only perform the activities for which they were designed. Provided that the conditions contained therein are met. The results of the performance of the contract will always be the same regardless of who initiates the first interaction.
  • They are
  • autonomous
  • . Smart contracts are great for automating all kinds of tasks - they work as a self-sufficient program. But what is important: in most cases, if the smart contract does not come into force, it is in "sleep mode" and does not take any action.
  • They are
  • immutable
  • . The code for each smart supply contract cannot be changed once it has entered into force. They can only be deleted provided such a function had previously been implemented in them. Thus, it can be said that the records in smart contracts are resistant to change.
  • What obstacles remain to be overcome?

    It is a new and relatively complicated technology that, unlike traditional contracts, requires technical know-how from individual parties as well as a certain level of legal knowledge. Another obstacle is the not very user-friendly interface. In addition, their development is still in its infancy and is thus associated with high financial costs. Wider implementation is also prevented by current legislation and the legal system. And we must not forget the fact that smart contracts are only as good as the programmer who creates them. According to Hosho, which focuses on security in the crypto-industry, up to 25% of smart contracts have a critical error in the code. Nevertheless, smart contracts have great potential to positively affect many industries. They can find their application in banking, insurance, or delivery services. It is difficult to say whether this will actually happen in the coming years. However, the possibilities offered by smart contracts are revolutionary and it would be most unfortunate if they did not get a chance.


    Jakub is a crypto trader and founder of Trader 2.0 project, which helps hundreds of traders from central Europe to understand cryptocurrency trading and its challenges. Jakub not o...


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