What are smart contracts and their purpose in cryptocurrency?

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To this day, blockchain technology continues to be prevalent in the world of crypto. After all, this is a public ledger where all transactions between users are recorded. With decentralisation, all participants in the blockchain have access to see and verify the transactions present. 

Those who perform the proof-of-work services receive the native coin or token of the cryptocurrency as a means of reward. While this method proved to be effective, crypto enthusiasts have recognised the fact that the proof-of-work system is costly due to high transaction fees. Aside from that, this system demands a lot of energy, which makes it unsustainable. Consequently, this has motivated people to look for new ways that everyone can benefit from.

This is where the dawn of the smart contracts era began, and if you want to learn more about what it is, continue reading this article at BTCPost.

What are smart contracts?

Smart contracts are the newest form of verification in blockchain technology. These are programs that activate or run when the terms and conditions indicated are met. If you think about it, smart contracts are the digitalised version of handwritten or printed contracts that people use in binding situations. When both parties agree on what is written on the contract, the agreed fulfilment will be effective and benefit those who are involved. 

Aside from that, the codes present in smart contracts are trackable and irreversible. This means that you cannot alter it anymore once the conditions are met and fulfilled. 

The dawn of smart contracts

Like cryptocurrencies, smart contracts also had their humble beginnings before becoming relevant in the crypto industry. In 1994, Nick Szabo pitched the idea of digital transaction protocols that carry out the conditions of a contract. The American computer scientist was also the one who invented the virtual currency known as Bit Gold in 1998. Fast forward to the present, the Ethereum blockchain was the first one to use smart contracts to execute any transactions. 

Figuring out how smart contracts work

Moving forward, learning how smart contracts work will make you understand the concept more. With that being said, here is a simplified explanation and guide on smart contracts:

  1. When two parties want to have a transaction, both need to determine the terms and conditions first just like how you do with their written counterparts. Doing this will allow both parties to edit and add more terms to the contract.
  2. Once everything is finalized, these terms will be converted into a programming code, which represents conditional statements. These conditional statements take the form of ‘if/then’ sentences, which state a condition and the desired outcome.
  3. Afterwards, the contract will be uploaded to the blockchain where each participant will receive a copy. All computers in the network will run the code to see if all terms are met and satisfied. When all participants verified this, the transaction will proceed to carry out.

With those three steps, you have successfully executed a smart contract! Now, it is time for you to know how it will benefit you!

Benefits of using smart contracts

Smart contracts have a lot of benefits when you use them. If you want to know what they are, here is a list to give you an idea:


Compared to the proof-of-work system, smart contracts are faster and more efficient. This is because everything you need is processed digitally, which includes verification and coding. With technology, there is no need to fulfil smart contracts manually. On top of that, smart contracts are cheaper because you do not have to spend so much time and money to complete a single transaction.

Trust and transparency

Smart contracts are related to decentralisation in a way since both have no third party involved. All the records present on the blockchain are shared, and all participants can access everything they need. Moreover, it is easy for you to track if there is any attempt on altering the contents of a contract. Additionally, no one would attempt to alter smart contracts because all of them are irreversible. 


Security should always be the first thing you need to be aware of because the contract can include something valuable. With this in mind, you can rely on smart contracts because it keeps the blockchain encrypted. As such, no one can view the details listed in the program code, unless they have access to it. 

Use of smart contracts

Smart contracts are more than just making any transaction straightforward. It also has different uses that can be beneficial to any user, allowing you to make the most of them. With that said, here are the following uses of smart contracts:


In the world of crypto, one of the things you will frequently hear is smart contracts, especially when you use Ethereum. This uses smart contracts to process its blockchain and help deliver transactions as soon as all conditions are met. Additionally, smart contracts also serve as enforced rules to dismiss the need for an intermediary.

Voting system

Aside from cryptocurrency, smart contracts can also be used for voting systems in politics. Using this method will help prevent any ballot tampering since it eliminates the need for using manual voting. 

Financial services

Smart contracts are useful for keeping track of financial transactions because they prevent any error, fraud or misrouting of funds. Additionally, this system is perfect for bookkeeping and preventing any chances of infiltration of financial records.

Should you use smart contracts?

The quick and easy answer to this question is yes! With the number of benefits and applications, smart contracts hold a promising future for a lot of things aside from cryptocurrency. On top of that, you get to dictate what you want to happen before you push through a transaction. 

If you want to know cryptocurrency-related topics, head over to BTCPost to find out more!

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