Day 4 — Simple explanation of smart contracts using real world example

3 min readAug 6, 2022

Hello friends 👋🏼, we learnt about the features of blockchain which include decentralization, consensus and smart Contracts. Today we will be learning about smart contracts together, vamos and let’s spend the next few minutes exploring another aspect in Web 3.

Table of Content
- What are smart contracts?
- History of Smart Contracts
- How do Smart Contract work?
- Use cases of Smart Contract
- Limitations of Smart Contracts
- Benefit of Smart Contracts

Cover image of smart contracts showing handshake

What Are Smart Contracts?

Smart contracts are set of rules or agreement in the form of computer protocols that runs on the blockchain platform processes transactions as soon as the set conditions are met, eliminating the need for a middleman.

History Of Smart Contracts

1994 — Nick Szabo, A cryptographer came up with the idea of being able to record contracts in form of computer code.

2008 — Satoshi Nakamoto introduced a P2P version of e-cash in which the world’s first digital currency “Bitcoin” was deployed.

2015 — Vitalik Buterin, a Canadian-Russian young man founded Ethereum which introduced the first working smart contracts.

How Do Smart Contracts Work?

Hi Friends, let’s use the example of 2 collegues Ridwan and Mathew. They are in a group were everyone utilized a book to keep track of transactions but the formats tend to be different, difficult to understand days later and sometimes not enforceable. To solve this problem and ensure everyone record the transaction in a similar and easy to understand way, the group decides to maintain a uniform format of recording their transaction. They come up with business rules and acceptance criteria which everyone follow (see image below)

In a decentralized system, those automated business rules are known as “Smart Contracts”.

Use Cases Of Smart Contracts

There are multiple use cases of smart contracts in different sectors such as Finance, Legal, Government, Agriculture, Real Estate e.t.c. Click here to learn more

Limitations Of Smart Contracts

- They are irreversible: meaning it is near impossible if not difficult to fix in case of issues

- They require high level of technical expertise

- They are not always reliable and they can be outage as some point

Benefits Of Smart Contracts

- Transparency

- Effective

- Guaranteed

- Trustless

References

Smart Contracts Explained | The Ultimate Beginner’s Guide (imiblockchain.com)

What is a Smart Contract and How do Smart Contracts Work (bitdegree.org)