Smart Contracts: Introduction & How They Work


In the world of blockchain technology, smart contracts have emerged as a revolutionary concept that has the potential to transform various industries.

This guide will provide you with a comprehensive understanding of what smart contracts are, how they work, and their significance in the blockchain ecosystem. We will explore the key features, benefits, and real-world applications of smart contracts.

By the end of this guide, you will have a solid foundation of knowledge to navigate the exciting world of smart contracts in blockchain.

1. Introduction to Smart Contracts

Definition and Concept of Smart Contracts

Smart contracts are computer programs that automatically execute and enforce agreements or contracts between parties in a transparent and secure manner. These contracts are built on blockchain technology, which ensures immutability and decentralization. Smart contracts eliminate the need for intermediaries, such as lawyers or notaries, by automating the execution of predefined terms and conditions.

Advantages of Smart Contracts

Smart contracts offer several advantages over traditional contracts. Firstly, they eliminate the need for intermediaries, reducing costs and increasing efficiency. Secondly, smart contracts are immutable and tamper-proof, ensuring the integrity of the agreement. Thirdly, smart contracts enable automatic execution based on predefined conditions, eliminating human error and ensuring accuracy. Lastly, smart contracts provide transparency and auditability, allowing all parties to verify the terms and conditions.

Key Elements of Smart Contracts

Smart contracts consist of several key elements. Firstly, they include the agreement or contract itself, which defines the terms and conditions that the parties agree upon. Secondly, smart contracts contain the code or program that automates the execution of the contract. This code is written in a programming language specifically designed for smart contracts, such as Solidity for Ethereum. Lastly, smart contracts utilize blockchain technology to ensure security, transparency, and decentralization.

2. How Smart Contracts Work

Blockchain Technology and Smart Contracts

Smart contracts are built on blockchain technology, which is a decentralized and distributed ledger that records and verifies transactions. Blockchain provides the foundation for smart contracts by ensuring immutability, transparency, and security. When a smart contract is created, it is stored on the blockchain and becomes part of the shared ledger. This ensures that all parties have access to the contract and can verify its execution.

Programming Languages for Smart Contracts

Smart contracts are written in programming languages specifically designed for blockchain platforms. The most popular programming language for smart contracts is Solidity, which is used on the Ethereum blockchain. Solidity is a statically-typed language that allows developers to define the behavior and logic of the smart contract. Other programming languages used for smart contracts include Chaincode for Hyperledger Fabric and Cadence for Flow.

Execution and Verification of Smart Contracts

Smart contracts are executed and verified by the nodes in the blockchain network. When a transaction triggers the execution of a smart contract, the nodes in the network validate the transaction and execute the code of the smart contract. This ensures that the terms and conditions of the contract are enforced. The execution of smart contracts is deterministic, meaning that the outcome is always the same for a given set of inputs.

Immutable and Irreversible Nature of Smart Contracts

One of the key characteristics of smart contracts is their immutability and irreversibility. Once a smart contract is deployed on the blockchain, it cannot be modified or tampered with. This ensures that the terms and conditions of the contract are enforced as agreed upon by the parties. The immutability of smart contracts increases trust and eliminates the need for intermediaries to enforce the contract.

In the next chapter, we will take a deep dive into how Smart Contracts are executed and enforced across P2P networks and decentralised blockchains.

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