What is a Smart Contract and How Does It Work?

June 6, 2021

Smart Contract

A smart contract is a contract between two or more individuals, which is executed automatically using computer code.

It is different from a traditional paper contract because everything takes place automatically. If the individuals agree to the terms and rules of the smart code, no one else can interfere or stop them because only the computer controls the entire process.

A smart contract is a code written in a computer language. You can use the Ethereum, Binance Smart Chain, Cardano Blockchain platform to create the contract.

The contract can be used for a variety of purposes. Using it, you can exchange money, buy investment shares, or purchase a property. In fact, you can use a smart contract to do almost everything that you do with a traditional paper contract.

Real-life Examples

  • Experts often use the example of a vending machine to describe how a smart contract works. Suppose you want to buy a can of soda that costs $1 from a vending machine. To receive your can of soda, you will insert a dollar bill in the vending machine slot and expect the vending machine to release and drop the soda in the take-out container.In this scenario, everything that takes place is automatic without anyone else involved. Hence, it is a smart contract. You, the buyer agreed to pay $1 to buy a can of soda. In return, the vending machine owner agreed to give you the can of soda.

    Everything is automatic without any human involvement and you knew exactly what you needed to pay to get the can of soda.

    When the agreement is formed on the Blockchain network, it may look like this: "WHEN the buyer pays $1 for the soda, THEN the vending machine will release the soda".

  • Let's look at another example. Suppose you want to buy a plane ticket online and the airline company that offers you the plane ticket also tells you that it will pay $100 if your flight doesn't depart within 30 minutes of the scheduled departure. The $100 will automatically show in your online travel account within a minute.In this case, you and the airline company agree to a smart contract, which automatically transfers the $100 to your online travel account if you have to wait more than 30 minutes. Everything is automatic without anyone else involved.

    On a Blockchain network, the smart contract may look like this: "WHEN the buyer buys the online airline ticket and IF 30 minutes have passed since the scheduled departure time, THEN transfer $100 to the buyer's online travel account."

    Once the contract is in place, the airline company can't stop the transfer. If the flight is delayed more than 30 minutes, the system will automatically transfer the agreed amount to the online travel account of the traveler.

The Platform

It is important to understand that a smart contract takes place on a Blockchain platform. A blockchain platform is independent and free from interference.

Ethereum is the most popular platform used for smart contracts. Binance smart chain is another well-known option.

Benefits of a Smart Contract

There are many benefits to a smart contract; however, smart contracts have become extremely popular due to their security and transparency features.


Once the smart contract is in place, it is almost impossible to hack it. This is due to the Blockchain platform, which distributes the information on several computers throughout the network. To get access to the information or to make changes to the terms, a hacker will need to access a large number of very secure computers.


Another well-known advantage of smart contracts is transparency. Each transaction related to a smart contract is recorded and available for everyone to view. If there is a problem, you can trace the problem directly to its source.

Creating a Smart Contract?

As described earlier, you can use a variety of different Blockchain platforms to create a smart contract. Ethereum and Binance smart chain are some of the popular platforms.

The smart contract is a set of codes that will run on the Blockchain platform. The program will reside on the platform until someone uses it.

In other words, you can also say that the smart contract is a type of online account, which has a balance and that can pay and receive payments from users. When users agree to a smart contract, payment is made to the user from the balance in the online account.

Once the smart contract is in place, it will run as programmed according to the rules defined in the contract.

What Are Tokens?

If you want to create a smart contract, you can build your own token. A token is a form of currency or an asset. You can also say that it is a type of cryptocurrency, which is built on a Blockchain.

Every token has a specific value that you can relate to a real-life currency. For instance, Tether is a popular token that has a value equivalent to $1. ChainLink is another well-known, which is roughly equal to $29.

It is not difficult to build your own token. You can often do it in less than half an hour with the MOONCLONE Bot

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