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Smart Contracts – How It Works, Its Application, and I...

Smart Contracts – How It Works, Its Application, and Its Benefits

Smart Contract is a term describing a special set of protocols capable of automatically executing terms and agreements between the parties of the contract (in this case, machine systems. calculation) thanks to the support of Blockchain technology.

The entire operation of Smart Contract is done automatically and without external interference, or through an intermediary third party. Transactions carried out using smart contracts are transparent, easily traceable, and cannot be tampered with or reversed. The terms in Smart Contract are equivalent to a legal contract and documented in a programming language.

The most outstanding feature of Smart Contract is that it allows two parties to correctly, securely, and quickly execute contracts; without the parties knowing each other before, nor needing to meet in person to be able to work with each other, or a third party that just needs an Internet connection.

In 1993, Nick Szabo came up with the first concept of a smart contract. At that time he laid out the main principles of operation, but at that time there was not enough technology and the right environment to realize it. But it changed with the advent and development of Blockchain technology.

How smart contracts work?

Smart contracts automatically execute pre-programmed terms before those terms have met all the necessary requirements. Its mechanism of action is similar to that of a vending machine.

First, the terms of the contract will be written in a programming language, then encrypted and transferred into a block belonging to Blockchain. After moving into the block, this Smart Contract will be redistributed and duplicated by nodes that are active on that platform. After receiving the execution order, the contract will be executed according to the predefined terms. At the same time, Smart Contract will also automatically check the implementation of the commitments and terms stated in the contract.

The benefits of using a smart contract

Smart Contract is an application that takes advantage of all the strengths of Blockchain technology so it has a lot of benefits, below are its main benefits.

  • Automation: The contract execution process is automatically equal. At the same time, you are the creator of the contract, no longer having to depend on a broker, an attorney, or anyone else. As such, it also eliminates the risks from third parties.
  • Can’t be lost: Your documents are encrypted on a shared ledger, which means they can’t be lost. With Blockchain, all of your friends have to store your documents.
  • Safety: No hacker can threaten them because Blockchain will ensure the safety of your documents.
  • Speed: Smart contracts use programming languages ​​and software code to automate terms, saving hours of unnecessary work.
  • Savings: by eliminating intermediaries, smart contracts save you tons of money
  • Be precise: Automated contracts are not only faster and cheaper but also avoid common mistakes when writing papers.

Advantages and disadvantages of smart contracts


  • Smart Contract’s application can be used in many fields in the future, at present, a number of fields have implemented smart contracts, including Electronic money, logistics, banking, real estate, and even voting…
  • Freedom: Not regulated by any agency
  • Transparent safety


  • Legality: You will not have your rights protected when an error occurs because the law of current countries does not have the policy to exploit and manage smart contracts.
  • Deployment cost: Need to pay for infrastructure systems, computers, and good programmers for them to deploy.
  • The risk from the internet: The nature of the Smart Contract is very safe, but if you reveal some sensitive information or are exploited by hackers, there will be cases of trouble.

What is required to create a smart contract?

  • Contract holder: Smart Contract must be provided with access to the products/services listed in the contract in order to automatically lock or unlock them.
  • Electronic signature: All parties participating in Smart Contract must agree to implement the agreement using their private keys (electronic signatures).
  • Contract Terms: The terms in Smart Contract take the form of a series of activities. And the parties to the contract must sign to accept it.

Above are the basic knowledge about the smart contract, its operations, applications, and its benefits. Hope that the sharing in the article has helped you gain more useful knowledge.


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