How Do Smart Contract Applications Actually Work

How Do Smart Contract Applications Actually Work

Table of Contents

All you need to know about the working of smart contracts with Ethereum and how industries will benefit out of smart contract applications.

smart contract applications

Blockchain, bitcoins, smart contracts and what not? The internet is full of blockchain technology today. However, only a few people know how it works. Besides, the many benefits it offers, one must know what blockchain and smart contracts are all about. The discovery of the idea of smart contracts was two decades ago. But, blockchain technology was unknown then. But, today with blockchain technology, one can actually implement this idea. So, let’s know what are smart contracts all about and how smart contract applications work.

What Are Smart Contracts?

A smart contract is nothing but a computer code which is an agreement between two people. Besides, for running smart contracts, you need blockchain technology. So, a public database stores all the smart contracts development, and they can’t be changed easily. Moreover, there is only a basic difference between a standard contract and a smart contract. The former establishes a relationship enforced by law while the latter uses cryptographic code.

The processing of the transactions on smart contracts happens via the blockchain technology. This means that there is no need for any third party to verify them. In fact, transactions can execute and continue in an automatic manner.

smart contract applications

Also, the smart contract must meet the conditions for the transactions to happen. Further, there are no trust issues as smart contracts cut the need for third parties.

Thus, the most important characteristics of a smart contract are:

  • Self-executing

  • Immutable

  • Self-verifying

  • Auto-enforcing

  • Saves unwanted  costs

  • Removes third parties

What are Ether and Ethereum?

But before going into the working of smart contracts, one must be familiar with Ethereum.


In short, Ethereum is a blockchain that records all executed codes as transactions. It allows developers to program their own smart contracts. These smart contracts are actually ‘autonomous agents’, as the Ethereum white paper calls them. Besides, the language is ‘Turing-complete’. This means that it supports a wide range of computational instructions.


Ether is the cryptocurrency that fuels the Ethereum blockchain.

How smart contracts use Ethereum?

Developers write the code of smart contracts using the native language of Ethereum which is Solidity. These contracts codes can be of various forms such as:

  • Transaction of money after the fulfilment of certain conditions.

  • Exchange of goods between parties

smart contract applications

But, a smart contract algorithm that uses Ethereum follows many steps for a successful execution. Let’s take a look.

  1. After developers write the code, the EVM- Ethereum Virtual Machine helps in uploading of the code. An EVM is a universal runtime compiler or browser that can help in executing the smart contract code.

  2. Once the code is on the EVM, it will be the same on each Ethereum node. Further, each node will try to run to check if the conditions are met or not.

  3. The digital asset called ‘Ether’ will help in fuelling the two or more parties involved with a contract of Ethereum.

  4. After the successful execution of the smart contract, the digital asset will be or re-distributed according to the logic specified in the code.

In other words, smart contracts use Ethereum and thus must be ‘Turing Complete’. This means that besides the conditional logic, they must be able to loop through as far as possible. That is how the execution of all the instructions in code can happen completely.

So, depending on the number of operations to execute, smart contracts can be simple or very complex. However, each function of the contract needs to a fee for complete execution. This fee is ‘gas’.

smart contract applications

Ethereum uses ‘gas’. It is the unit by which one can estimate the degree of difficulty of computational efforts. In short, if your smart contract’s instructions are complex, you will need more gas to execute it.

Also, Ethereum maintains a shared state of account balances. This helps in getting rid of the issue of tracking and compiling of transaction outputs. It actually enables smart-contracts to move balances across different accounts easily.

Some smart contract applications

Smart contracts help in many ways to build different kinds of applications. In fact, there are endless possibilities for smart contracts. They are being used for trades, insurance, legal processes and even crowdfunding agreements(ICOs). Let’s take a look at how smart contract applications are benefitting industries and how they have the potential to assist other sectors too.

Insurance companies

In 2017, insurance companies like the Atlas Insurance in Malta and Axa in France had tested smart contracts. These smart contracts helped in compensating airline customers if their flights were late. The major benefits of smart contracts observed were:

  • It saves a lot of time and money. If the flight is on time, the smart contracts send the money of the fare. But, if the flight is late, money is automatically sent back to the users via smart contracts.

  • There is no confusion about the fact if the Insurance companies will pay the agreed amounts. Smart contracts help in instant compensation.

smart contract applications


Smart contracts can help in making voting systems completely trustworthy and more secure.
Moreover, applications like ‘FollowMyVote’ use smart contracts and blockchain technology to protect votes from any fraudulent activities.

The best advantage of smart contracts for voting is that once a voting transaction enters the blockchain, nobody can change it. Also, the smart contract sends a token to an address of the winner as soon as the voting process gets over. Thus, the whole process is fair and the winner is the genuine candidate.


One of the most popular smart contract use cases is ICOs or Initial Coin Offerings. They help startups to raise funds for their businesses. The biggest advantage of ICOs is that entrepreneurs can avoid conventional investing regulations with these. Nowadays, there is a huge production of ICOs on the Ethereum blockchain.

ICOs have actually given a new way of using blockchains. It enables smart contracts that have a number of unique features like:

  • Automatic execution of contracts according to the logic programmed into it.

  • Multisignature functionality among two or more parties that can approve or reject any transaction in an independent manner.

smart contract applications

Health systems

Smart contracts are a blessing for the healthcare systems. They can record and transfer data in a safe way. Genome blockchain networks like the ‘Encrypgen’ have already used smart contracts for the medical industry. This application helps in transferring patient data securely without the interference from third parties. So, patients are in full control of their own data.

Further, it safeguards the patients’ medical history because researchers have to pay if they want to use any patient data. Besides, it is the sole wish of patients if they want to sell their data for any research.

Signing off…

Altogether, smart contracts are here to revolutionise everything. Though blockchain and smart contracts are hype currently, many people don’t know about it. The best thing about smart contracts is that they eliminate middlemen. Also, they restore the trust of end users in the transaction system.  It can reduce fraud, delays and unwanted costs too. So, smart contracts can make the world a better place. What do you think? Will companies use smart contracts in the near future?

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