Topics In Demand
Notification
New

No notification found.

Smart Contracts on the Blockchain: What They Are, How They Work, and Examples
Smart Contracts on the Blockchain: What They Are, How They Work, and Examples

June 18, 2025

30

0

 

Smart contracts are one of the most revolutionary outcomes of blockchain technology. They're not just lines of code; they are digital agreements that self-execute when certain conditions are met, without the need for intermediaries. Imagine a vending machine, but for legal and financial agreements.

 

What are Smart Contracts?

Smart contracts are digital agreements stored and executed on a blockchain. Unlike traditional contracts that require human oversight, smart contracts are self-executing and enforce the terms automatically when predefined conditions are met. Nick Szabo introduced the concept in the 1990s, but it gained momentum with the launch of blockchain platforms like Ethereum.

They run on blockchain technology, ensuring the contract is secure, decentralized, and tamper-proof. Once deployed, the terms can’t be altered; this builds trust between parties without requiring intermediaries like lawyers or banks.

 

How Do Smart Contracts Work?

At the core, smart contracts use if-then logic. Here’s a simplified example: If person A sends 1 ETH to person B, then the agreement will automatically transfer digital ownership of a token. The contract checks the blockchain for the required condition; if it's met, the action is executed instantly.

Each smart contract consists of:

  • Conditions (triggers): These are the rules that must be satisfied.
     
  • Code logic: Written in programming languages like Solidity.
     
  • Immutable records: Stored on-chain and visible to all users.
     

Smart contracts are hosted on blockchain networks like Ethereum, BNB Chain, or Solana, and once deployed, they can't be edited or deleted, adding an extra layer of security and trust.

 

Examples of Smart Contracts

Smart contract development services are being used in many industries, especially in decentralized finance (DeFi), to eliminate middlemen and bring automation. Here are a few examples:

  • DeFi Lending Platforms: Protocols like Aave and Compound let users lend or borrow crypto without banks. Smart contracts handle the interest, collateral, and repayments.
     
  • NFT Marketplaces: Platforms like OpenSea use smart contracts to automate ownership transfers, royalty payments, and bidding.
     
  • Supply Chain Tracking: Companies use smart contracts to automate shipping updates, verify product authenticity, and release payments once goods are delivered.
     
  • Insurance Payouts: Claims are processed automatically when conditions (like weather data) are verified by oracles.
     
  • Voting Systems: Transparent voting with immutable records is enabled through smart contracts, enhancing trust in election systems.

 

Benefits

  • Automation: Everything runs without manual involvement.
     
  • Speed: Instant execution once conditions are met.
     
  • Transparency: Everyone can verify the contract terms and transactions.
     
  • Security: No unauthorized changes; once deployed, it can’t be tampered with.
     
  • Cost-Efficiency: No middlemen = lower operational costs.
     

Challenges

  • Coding Bugs: Poorly written code can lead to massive losses.
     
  • Legal Uncertainty: Not all governments recognize smart contracts as legally binding.
     
  • Scalability: Congested networks can lead to high fees and delays.
     
  • Security Risks: While contracts are immutable, vulnerabilities in code can be exploited if not properly audited.

 

Conclusion

Smart contracts on the blockchain are more than a trend; they're reshaping the future of digital interaction. Whether it's finance, real estate, or public records, these self-executing programs offer unmatched efficiency and transparency. So, are you ready to put your trust in code


That the contents of third-party articles/blogs published here on the website, and the interpretation of all information in the article/blogs such as data, maps, numbers, opinions etc. displayed in the article/blogs and views or the opinions expressed within the content are solely of the author's; and do not reflect the opinions and beliefs of NASSCOM or its affiliates in any manner. NASSCOM does not take any liability w.r.t. content in any manner and will not be liable in any manner whatsoever for any kind of liability arising out of any act, error or omission. The contents of third-party article/blogs published, are provided solely as convenience; and the presence of these articles/blogs should not, under any circumstances, be considered as an endorsement of the contents by NASSCOM in any manner; and if you chose to access these articles/blogs , you do so at your own risk.


© Copyright nasscom. All Rights Reserved.