Simplify transactions: What is a smart contract and how does it work?

In the digital age, traditional transactions and contracts face major challenges: slow, complex, and risky, leading to a revolutionary new technology — smart contract (Smart contract) — which allows transactions to be executed automatically and securely without relying on intermediaries.

Context of Technology: From Past to Present

When did smart contracts come into our world?

The history of smart contracts is not as new as many think. In 1994, American computer engineer Nick Szabo proposed the concept to address the cumbersome storage and verification of data at that time. He also attempted to create a digital currency called “Bit Gold” in 1998, before the advent of Bitcoin.

Later, blockchain technology (Blockchain) played a crucial role:

• 2008: The first-generation blockchain (Blockchain 1.0) was created to support Bitcoin, the first digital currency with a P2P (Peer-to-Peer) system, without a central bank.
• 2014: The second-generation blockchain (Blockchain 2.0) integrated smart contract technology. This was the birth of Ethereum, allowing developers to write programs freely.
• 2017 to Present: The third-generation blockchain (Blockchain 3.0) emerged with decentralized applications (Dapps) and the application of smart contracts in NFT games and digital art.

What is a smart contract (Smart contract) really?

Smart contract (Smart contract) is simply a computer program that operates automatically based on predefined conditions. It has no signatures from executives or legal jurisdictions — just code. When conditions are met, everything happens automatically.

Differences between regular contracts and smart contracts:

• Regular contract: written on paper, may be tampered with, relies on intermediaries
• Smart contract: stored on the blockchain, operates automatically, no one can hack it

Think of an automatic vending machine: you insert the correct amount of money, the machine checks the amount, and then releases the product. If the money is insufficient, it won’t dispense — that’s how smart contracts work.

How do smart contracts work: step-by-step process

When we decide to create an agreement via a smart contract, it proceeds as follows:

Step 1: All parties agree

Everyone involved in this contract must decide:

• What are the conditions?
• When will it be executed?
• What should be the outcome?

Step 2: Write and verify the code

Translate the agreement into programming language. Since code is sensitive to errors, this step is very important and should undergo a security audit by experts.

Step 3: Deploy on the blockchain

Once the code is secure, it is sent to the blockchain. After this, no one can modify or delete it — it becomes a permanent contract.

Step 4: Wait for trigger conditions (Trigger)

The smart contract continuously monitors the blockchain for conditions such as:

• Is the date reached?
• Is the payment completed?
• Has the invoice arrived?

Step 5: Execute actions

When conditions are met, the smart contract automatically performs actions such as:

• Transferring money to the seller
• Registering asset ownership to the buyer
• Releasing or locking items

Step 6: Record and notify everyone

The blockchain records the final result. Everyone in the network can verify and see it at any time — full transparency.

Real-world example: Bicycle betting

Pom and Golf bet $10 on who will win a bicycle race. Traditionally, there might be issues if the loser refuses to pay. But with a smart contract:

• Both deposit $10 into the contract
• When the race results are out, the contract automatically pays $20 to the winner
• No cheating, no side talks

Advantages that make smart contracts special

✓ Fully automatic operation

No need to wait for humans, no emails exchanged. Just code makes it happen. For example, if the condition is that a child over 18 can withdraw money, the system will release the funds immediately.

✓ Transparent and public data

Blockchain is a public ledger. Everyone can see what the contract is, how it works, who sent money, with no hiding (but wallet addresses are not linked to real identities).

✓ Security against forgery

With cryptography (Cryptography), no one can forge or steal contracts or funds.

✓ Continuous verification

From the moment the contract is created, the code is public. Everyone can review how it functions.

Disadvantages to be cautious of

✗ No intermediaries

If the contract has issues, there are no companies or customer service to help. The blockchain has no boss; everyone must look after themselves.

✗ Laws are not yet up to date

Foreign legal systems have not yet recognized smart contracts. If you are scammed or suffer damages, there may be no legal recourse.

✗ 100% trust in code

Everything depends on the code. If the developer embeds vulnerabilities or forgets something, you cannot fix it later because the blockchain does not allow edits.

What are current applications of smart contracts?

1. Stablecoins (Stablecoin)

Cryptocurrencies with non-volatile value pegged to real-world assets, e.g., 1 Dai = 1 USD, to facilitate easier usage.

Popular coins on Ethereum:

• Dai — the most well-known decentralized stablecoin
• USDC — by Coinbase and Circle Bank
• Tether — the first fiat-backed stablecoin in the market

Advantages of Stablecoins:

• Send money worldwide over the internet
• High demand; can be stored or lent out
• Exchangeable with other Ethereum tokens
• Secured with cryptography; no one can create or steal

2. Non-fungible tokens (NFT)

NFTs are digital tokens that prove ownership of assets, unlike regular money. Each NFT has a unique code and cannot be exchanged one-to-one.

Current uses of NFTs:

• Foundation — platform for displaying, buying, selling, and collecting digital art
• The X — AI-designed NFT shoes usable in the Metaverse
• Decentraland — virtual world items, accessories
• ENS — domain name service allowing you to name your wallet with English words

3. Decentralized exchanges (DEXs)

DEXs enable buyers and sellers to exchange Ethereum or other tokens directly without intermediaries.

Popular DEXs:

• Uniswap
• Kyber
• dYdX
• 1inch

4. Digital escrow services

For example, OpenLaw Forms makes creating legal contracts easy. Just fill out a form, and the data is securely recorded on the blockchain.

5. Insurance claims

Smart contracts can automatically pay insurance when verifiable events occur, such as:

• Natural disasters
• Car accidents
• Others

The future of smart contracts: When will they cover the world?

From past to present, smart contracts have evolved from mere ideas to practical technology. Many large organizations adopt them because they are efficient, transparent, secure, and reduce operational costs.

Why smart contracts are the future:

• Reduce complexity, lower costs, increase speed
• Eliminate the need for intermediaries
• Make transactions more transparent and secure
• Applicable in finance, insurance, art, gaming, and more

smart contract (Smart contract) will become the foundation of future digital transactions, making business, contractual agreements, and value exchanges easier and more trustworthy.