Unlocking the Basics: A Beginner's Guide to Smart Contracts and Their Functionality

Author : Dency Emily | Published On : 12 Feb 2024

Smart contracts, the digital counterparts of traditional contracts, are revolutionizing various industries, particularly within the crypto realm. In this comprehensive guide, we delve into the intricacies of smart contracts, exploring their definition, features, functionality, creation process, historical evolution, use cases, advantages, and potential drawbacks.

What is a Smart Contract?

A smart contract is a self-executing computer program encoded with terms that automatically trigger when predefined conditions are met. Stored on a blockchain, these contracts become immutable once executed, providing a tamper-proof and trustworthy solution for transactions.

Features of Smart Contracts

Smart contracts stand out from traditional contracts due to their distinctive features:

  1. Immutable: Once deployed on the blockchain, smart contracts cannot be altered.
  2. Customizable: Developers can tailor smart contract conditions before deployment.
  3. Transparent: The code is publicly visible on the blockchain, ensuring transparency.
  4. Autonomous: Executed through blockchain nodes, eliminating the need for intermediaries.
  5. Trustless: The automation of execution removes the need for third-party verification.
  6. Distributed: Contract conditions are distributed across the blockchain, preventing single-party manipulation.

How Smart Contracts Work

Smart contracts operate based on a simple logic of "if/when…then…". Developers set conditions, and when met, a network of nodes executes predefined actions, updating the blockchain upon completion.

Creating a Smart Contract: Step-by-Step Guide

To create a smart contract on the Ethereum network, follow these steps:

  1. Create a MetaMask Wallet: Download and install the MetaMask wallet, create an account, and connect to the Ethereum mainnet.

  2. Choose the Test Network: Select a test network (e.g., Rinkeby, Goerli) on MetaMask for testing your smart contract.

  3. Add Testnet ETH to the Wallet: Obtain testnet ETH for testing purposes.

  4. Use Remix Browser to Write the Smart Contract: Write the smart contract code in Solidity using the Remix editor in the Remix Browser IDE.

  5. Create a .sol Extension File: Generate a .sol extension file for compatibility with Solidity.

  6. Write the Smart Contract Code: Enter the smart contract code in the extension file and choose a compiler version.

  7. Deploy Your Smart Contract: Deploy the smart contract on the Ethereum test network and obtain the contract address.

History of Smart Contracts

The concept of smart contracts was first proposed by American computer scientist Nick Szabo in 1994. The first smart contract protocol, involving conditions, was implemented on the Bitcoin blockchain in 2009. Ethereum's release in 2015 marked a significant milestone, introducing programmable smart contracts with enhanced efficiency.

Uses of Smart Contracts

Smart contracts find applications across diverse industries:

  1. Entertainment Industry: Facilitates royalty payments and resolves disputes for artists.

  2. Real Estate: Speeds up property ownership transfers upon complete payment.

  3. DeFi Applications: Empowers decentralized financial services without intermediaries.

  4. Gaming Industry: Ensures tamper-free transactions in blockchain-based games.

  5. Supply Chain Management: Automates actions based on predetermined conditions.

  6. Government Elections: Enhances transparency and minimizes voter manipulation.

  7. Healthcare Industry: Reduces insurance fraud by validating and authorizing payouts based on accurate data.

Advantages of Smart Contracts

  • Automation: Enhances speed and efficiency, saving time.
  • Trust and Transparency: Eliminates intermediaries, builds trust, and ensures transparency.
  • Immutable: Code and data on the blockchain are secure and unalterable.
  • Fault Tolerance: Decentralized control increases resilience against failures.

Disadvantages of Smart Contracts

  • Human Errors: Vulnerable to coding errors during development.
  • Regulatory Uncertainty: Lack of regulatory clarity and standards.
  • Immutability: Changes require deploying a new smart contract.
  • Real-time Data Processing: Challenges in handling real-time data for certain applications.


Smart contracts represent a significant advancement over traditional contracts, offering efficiency, transparency, and trust. Despite potential challenges, their advantages have led to widespread adoption in cryptocurrency, banking, and beyond. As smart contracts continue to evolve, they are poised to play a crucial role in shaping the future of transactions and agreements across various sectors.