What are Smart Contracts?

A Smart Contract is a contract that is defined as a computer program in charge of executing agreements that have been configured by various parties (such as people or organizations).

It ensures that certain actions occur within a framework of a set of established conditions.

Therefore, when an action is established or scheduled in advance, the smart contract will trigger the corresponding clause automatically.

The term was coined by Nick Szabo- a cryptographer- in 1993. He proposed this as a solution to what was the contract system at that time; however, the scope of the technology was very limited in those years.

In order for it to be viable, a payment method was necessary to implement it. However, this method did not appear until 2009 with the so-called Bitcoins.

On the other hand, the technology with which Bitcoins work, that is, Blockchains, did make the operation of this contract possible. With the creation of Ethereum, the execution of this new mechanism became a reality.

Being in a decentralized system, these smart contracts are not under the control of any of the parties involved in the agreement. For this reason, the conditions can be programmed, they cannot be modified because they are placed on the Blockchain and, as a last step, they must be signed by the parties for greater security of the commitment.

Objectives of Smart Contracts

Now that we know what smart contracts consist of, let’s see what their objectives are:

  • Being able to count on a security system much greater than that of a traditional contract.
  • Cost reduction.
  • Save the time normally involved in these types of interactions.

In short, avoiding fraud is one of the great benefits of this new contract system.

Uses of Smart Contracts

Just as the Internet was previously an unimaginable thing and is now used in almost all areas of life, so are Smart Contracts; better and more ways to use them will be discovered every time.

In the following lines there is a summary of all the uses that are given to these smart contracts today.

Health services:

  1. Electronic medical records: these smart contracts will allow doctors and providers to have easy access to the medical records of patients, after reaching that agreement between the parties.
  2. Access to health information of the population: many health research organizations will be able to learn personal data of patients to whom, through the contract, micropayments will be made.
  3. Health status monitoring: actions performed on patients regarding their health can be tracked through the Internet of Things; meanwhile, contracts generate rewards that are based on facts.

Financial services:

  1. Cancellation of coupons and bonds: these contracts automatically calculate and cancel the coupons and make a refund of the money in a matter of bonds.
  2. Loans: if the money is not canceled in the agreed time, the smart contract would execute the withdrawal of the guarantees.
  3. Settlement of operations: the contract calculates the amounts and cancels them all automatically.
  4. Inheritances: once the contract proves death, it is responsible for automatically distributing the assets to all the heirs.
  5. Microinsurance: a calculation is made and micropayments are canceled based on the use of a device connected to the network.
  6. Security deposit in the property registry: the contract makes a verification of the information external to the Blockchain; once ownership is transferred from the seller to the buyer, the contract automatically gives the funds to the buyer.
  7. Donation Automation: Donation agreements can be reached in certain periods of time.

Intellectual Property Services:

  1. Royalty payments: the contract is responsible for distributing the royalty money to artists and other parties, according to the agreed terms.

Public Sector Services:

  1. Bets: two parties can place bets with the security of a contract for the cancellation of the agreed money without the need for intermediaries.
  2. Voting: the contract performs a validation of the voter’s criteria, registers the vote and initiates the agreed actions, such as determining which was the majority vote.
  3. Smart properties: houses, cars, cell phones, etc., everything that can be connected to the internet is considered a smart property and can be sold or rented automatically with the help of a Smart Contract.

Energy Services:

  1. Autonomous charging stations for electric vehicles: the procedure of a deposit is made, the charging station is made available and the remaining funds are returned once carried out.



How do they work?

To better understand how smart contracts work, it is best to put an example: imagine a food vending machine, the kind that you can easily find in airports.

This machine is programmed so that after you enter a certain amount of money and a code, you can get the food or drink you have selected, right?

On the other hand, this machine is also configured to return money in case you have entered more and to notify you if the product you have selected is out of stock.

Therefore, this configuration of the machine would be the Smart Contract and the parties involved would be the machine and you.

The conditions of this contract would be those that we have mentioned: give money, give you food, return money, etc. 

Actions that should trigger others and automatically enforce the contract.

For automatic language, this works with a sentence called in English “if … then” and means that if an action or agreement is fulfilled, then the condition will be given.

In short, a Smart Contract works as follows:

  • The parties schedule the terms of the contract.
  • These terms are stored.
  • When the conditions are met, the system executes the contract.
  • The established consequences occur.



Despite the fact that the Smart Contract concept began to be used in the 90s, it did not become a reality until the emergence of Blockchain technology. A unique technology since no one can manipulate the system or go back to overwrite it. Additionally, the Blockchain has been shown to maximize transparency and anonymity as well. 

How is it possible? 

Using a unique alphanumeric identifier. That is, each user has access to the chain through a certain code, and each user can decide if he wants to remain anonymous in the transaction or wants the other user to be able to identify him. 

A great attribute that it has is that transactions can be programmed with algorithms and these can automate transactions between users.

Therefore, a smart contract is capable of being executed and enforced by itself fully automatically, without intermediaries or mediators. 

In addition, they can be created both by natural and / or legal persons, but also by machines and other programs that work autonomously. 

Smart Contracts are valid without the need to depend on authorities, due to the use of Blockchain technology. 

It is also important to note that, being distributed by thousands of computers, it prevents someone from guarding it and eliminates bureaucracy.

If you need advice on Smart Contracts and other issues related to blockchain technology, do not hesitate to contact us.

Also, if you want to know more information about this and other topics related to blockchain and others, stay tuned. 

Until next time.

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