Smart Contracts: How They Work in Blockchain

Smart contracts are a binding handshake between parties

Billionaire crypto investor Mark Cuban believes commercial smart contract adoption will be the next catalyst for the cryptocurrency and blockchain market. He believes smart contract technology can be geared toward commercial usage and even replace software-as-a-service (SaaS) apps.

Businesses that adopt smart contract functionality will gain a competitive edge. But what is a smart contract, and how can it benefit commercial enterprises? We’ll explain how smart contracts work and why this blockchain technology is the future.

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What is a Smart Contract?

smart contract is a computing program stored on a blockchain network and runs when predetermined conditions are realized. It operates very similarly to an if/when/then computing statement. Smart contracts automatically execute agreements without intermediary involvement or time loss.

Smart contracts can automate workflow by triggering each action as conditions are met. And because of its high levels of authentication and security being on a blockchain, the technology can be applied to a wide variety of applications, enabling enterprises to increase efficiency by cutting out intermediaries, bureaucracy, and time lag.

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How Smart Contracts Work in Blockchain

Participants first need to determine the smart contract’s terms, tasks, rules, framework, and parameters. A developer can then program the smart contract or establish a template, web interface, or other network tools to automate and simplify creating the smart contract.

All parties digitally sign the smart contract to bind and greenlight the smart contract. Then the smart contract executes on the blockchain network when all terms and conditions are satisfied. Once the smart contract transaction completes, the blockchain updates and only involved parties can access the results.

Advantages of Using Smart Contracts

Smart contract technology can give enterprises a competitive advantage by:

  • Efficiency: Executes immediately when all conditions are met and reduces process errors because the contract is automated and digital.
  • Accuracy: All parties agree on the conditions, which can’t be altered once the contract is signed.
  • Trust and Transparency: Binds between the participants, and changes cannot be made without all participants acknowledging.
  • Security: Utilizes blockchain encryption which makes hacking a single record extremely difficult.
  • Lowered Operational Costs: Removes the need for intermediaries to manage transactions, lowering operational costs and eliminating middlemen fees.

Risks of Using Smart Contracts

While smart contracts are very effective, there are a few risks enterprises should be aware of:

  • Almost Impossible to Change: Once the smart contract is signed, it’s extremely challenging to change. All parties will want to ensure the terms and rules are correct before signing the contract.
  • Some Terms May Be Challenging to Ensure: Depending on the terms agreed upon, parties must act in good faith and deal fairly for terms outside the contract’s control.
  • Vague Terms: If the contract has terms that are difficult to interpret or validate, the contract may struggle to complete.
  • Blockchain Security Glitches and Creation Errors: When a blockchain network is created, the code needs to be tight, or hackers can exploit vulnerabilities.

Can Smart Contracts Be Hacked?

Smart contracts may become compromised if security flaws exist on the blockchain. This is particularly common with cryptocurrency exchanges. If the security protocols are weak, hackers can access data on the smart contract to steal tokens or data.

Because this is a possibility, investors should research which blockchain networks and exchanges operate at the highest levels of security and have a proven track record for securing transactions.

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businessman evaluating operations on tablet

Practical Applications of Smart Contracts in Blockchain

The opportunities to leverage smart contracts are just beginning to be realized. Several markets and industries are just beginning to tap into the potential of smart contract utility, such as farming, healthcare, AI, and other emerging technologies. Here are just a few examples of how enterprises can use smart contracts for practical applications:


Smart contracts can handle lending, trading, borrowing, and other financial services for financial institutions and enterprises in real time. Decentralized finance (DeFi) applications (dApps) can provide 24/7 availability and functionality for a growing list of financial services and products.


Using smart contracts, gaming companies can release games where players can pay to play, play to earn tokens, and unlock assets through in-game purchases more efficiently and effectively. Metaverse gaming is playing video games on a blockchain network. With its money-making potential, this is the future of the gaming industry.


Smart contracts are the driving innovation of e-signatures that can be used as binding legal agreements. Utilizing smart contracts over a secure blockchain enables legal enterprises to automate many legal agreements and lower operational costs by eliminating intermediaries.

Real Estate

Many real estate enterprises are beginning to tap into the potential of smart contracts by making real estate investment more accessible through fractional ownership. Investors can buy the real estate company’s cryptocurrency to fund real estate deals where they would receive fractional ownership based on their token holdings. It can also handle legal real estate purchases and reduce the need for closing fees, title fees, and broker fees.

Related Link: Blockchain Applications Outside of Crypto

visualization of blockchain network

Smart Contracts Enable Businesses to Operate More Securely and Efficiently

As businesses see and understand the value of smart contracts in blockchain, they can reduce costs, improve efficiency, and heighten security. Adopters will have a competitive edge in attracting new clients and customers by offering more robust products and services.

Unbanked strives to educate investors on blockchain technology and terminology to help them invest wisely in crypto technologies and platforms. The more you know about these emerging technologies, the better your position will be to expand your investment portfolio.

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