What Are Smart Contracts? Examples, Use Cases and 2024 Trends
A smart contract is a program that activates and enforces a certain contract between two or more parties. It follows the rule “if… then… “, exists in a transparent, decentralized environment and is irreversible unless programmed otherwise.
A well-designed line of code put into a suitable environment can undertake the work of almost any intermediary, control the execution of the deal, and save your money. Smart contracts came into being to make our everyday lives easier and legal deals more affordable by replacing people with dedicated tech.
Table of Contents
- A Bit of History
- How Do Smart Contracts Work?
- Smart Contract Use Cases
- A Real-Life Use Case
- DApps And Smart Contracts
- Downsides of Smart Contracts
- Key Trends in Smart Contracts for 2024/2025
- Bottom Line
A Bit of History
Smart contracts were pioneered by Nick Szabo, an American cryptographer and computer scientist, who is believed to be Satoshi Nakamoto by some people. In 1994, he proposed the idea of a digital protocol that can be used to pass on information by using mathematical algorithms. Once the pre-arranged terms are fulfilled, the corresponding transaction is processed.
But before blockchain tech came along, smart contracts had been missing the proper environment for development. Until Satoshi Nakamoto introduced blockchain in 2009, the logic of smart contracts did not make sense. Although it is possible to program smart contracts on the Bitcoin network, the whole process will be difficult and the end result will be limited. But once the Solidity-powered Ethereum network started growing, it proved to be the perfect ground for designing complex smart contracts.
The beauty of smart contracts is that they eliminate the need for intermediary oversight and reduce the potential for disputes, all while ensuring the process is faster and less costly.
How Do Smart Contracts Work?
The smart contract model requires three things to work properly: the participants, the terms they agree upon, and the subject of this agreement. Smart contracts require public-key cryptography and decentralized databases, so they can only operate in a blockchain environment. Ethereum is not the only blockchain network that enables the work of smart contracts. Apart from the above-mentioned Bitcoin network, blockchains such as EOS, TRON, RSK, Stellar, and others support smart contracts too.
The Solidity language used in the Ethereum network allows programmers to develop their own programs, including smart contracts. The language is also compatible with a wider range of computational instructions.
A smart contract can best be understood by comparing it to a vending machine. You set up a program to get the product you need, pay the required amount, and the machine does all the work for you. To activate a smart contract you need to send a certain amount of cryptocurrency to the specified address, and in exchange you receive whatever you agreed for: a contract for the rental apartment, a property ownership, etc.
Smart Contract Use Cases
The easiest way to understand how smart contracts work is to use a real-life use case. Let’s say you want to rent out your apartment to someone you’re not familiar with. The majority of people prefer to leave the paperwork to the real estate agents and let them handle the legal side of things. For their services, the agents receive commission.
With smart contracts you won’t need help from any third parties. It is possible to use a smart contract with your future tenant which kicks in once the tenant transfers a certain amount of money to you. You won't need to put blind trust in your tenant as the entire money-collection process will be automated. What’s more, you can set a number of additional rules. For example, if they are late with the next monthly payment, you can charge them with a penalty fee. Or terminate the contract if they fail to pay rent during the pre-defined period of time.
Smart contracts functionality is potentially limitless. Imagine buying a property and renting it out together with your partner. This sort of complex case can also be handled by smart contracts, so you will receive compensation based on your investment percentage.
Real estate is not the only area where smart contracts can come in handy. Mortgages, insurance, voting, supply chain, e-commerce, various financial services, and any other industry that depends on transferring finance (or other value) can benefit from implementing the smart contract tech.
A Real-Life Use Case
Let’s say Bob is looking to rent his apartment out to Alice. To do so, they create an agreement on the network that states, “If Alice sends $1,000 to Bob, then she can move into the apartment tomorrow”. This information is recorded on a blockchain, which means that nobody can change the rules afterwards. The smart contract verifies the identity of Bob and Alice using public-key cryptography. Once Alice sends funds to the specified address, the contract allowing Alice to move in is released, and at the same time, Bob receives the funds. Bob doesn’t need to remind Alice to pay the money, and Alice doesn’t need to worry that Bob will suddenly ask her to pay extra. And none of them needs to pay for the middleman services. Transparency and straightforwardness are hallmarks of the agreement, which is automatically executed once all the requirements are met.
Also, Bob can activate a chain of dependable smart contracts, where the second contract is activated once the first one is carried out successfully. This way he can easily handle monthly rental payments or other complex processes.
DApps And Smart Contracts
In the Ethereum network smart contracts and dApps walk hand in hand. DApp, a decentralized application, is an app built in the blockchain environment. Unlike traditional apps, a dApp doesn’t run on any server but uses a distributed system instead. It stores its data in a decentralized ledger and typically supports an open-source model.
Smart contracts are the driving engine of any dApp as they help them to store and process data. Although dApps might look like your regular app, the implementation of the smart contract tech makes them decentralized and transparent, and their transactions irreversible. Often, blockchains design their own tokens to fuel the work of dApps, while others prefer to stick to using Ether as the main transaction coin.
Downsides of Smart Contracts
Smart contracts do sound like a technology of the future, but they still require some major improvements, like any other blockchain-based technology.
One of the biggest downsides of smart contracts is their potential vulnerability. You have to make sure that the code behind the contracts is flawless. Otherwise, the whole system can be compromised. We’ve already witnessed several major cases, such as the DAO or the Parity wallet hacks, when the attackers used some loopholes in smart contracts to steal money.
As of now, smart contracts lack taxation and regulation. Since the technology is still in its infancy, there is no set of rules approved at the government level to regulate it. What if the conditions that you agreed upon are not met in real life? For example, the apartment that you paid for via the smart contract turns out to be not up to standard. With a traditional contract, you could go to court to solve the issue, but with a smart contract it is not yet possible.
In addition, smart contracts are not flexible and all transactions are irreversible. At the same time, this is one of their main advantages. On the one hand, it is a big advantage that nobody can tamper with the transaction code. On the other hand, you cannot undo it in case of a mistake.
Key Trends in Smart Contracts for 2024/2025
1. Increased Integration with Traditional Business Processes In 2024, we are seeing a greater push towards integrating smart contracts with traditional business processes. Companies are adopting blockchain technology to automate everything from supply chain management to payroll services. This integration increases efficiency and reduces human error, making processes seamless and more reliable.
Supply Chain Management. Companies in the supply chain sector are utilizing smart contracts to ensure transparency and efficiency from production to delivery. This use of blockchain technology helps in tracking goods, verifying authenticity, minimizing delays, and combating counterfeiting. Financial Services
The financial sector, including fintech companies and traditional financial institutions, is leveraging smart contracts to automate transactions, streamline audits, facilitate real-time fund transfers, and improve the overall efficiency of financial operations.Human Resource Management. In the human resources field, smart contracts are applied to automate and enhance various HR processes. They help in streamlining payroll processing, ensuring timely and accurate salary disbursement, automating benefits administration, and maintaining tamper-proof records of employee training and certifications.
Real Estate. The real estate industry is using smart contracts to automate complex legal procedures such as ownership transfers, payment processing, and property title verifications, reducing the need for intermediaries like real estate agents and lawyers, thus lowering transaction costs.
Intellectual Property. Smart contracts offer a way for artists, writers, and creators to protect their intellectual property through transparent and immutable records that automatically enforce copyright, license terms, and royalty payments.
These applications demonstrate the growing acceptance and utility of smart contracts across various sectors, driven by their ability to provide secure, transparent, and efficient solutions.
2. Regulatory Clarity and Adoption
At a broader level, in 2024 there is a growing recognition of blockchain's role in various sectors, prompting legislative bodies to propose regulations that facilitate blockchain and smart contract applications. This includes discussions in the European Union and the United States about setting standards and guidelines that could globally influence how these technologies are implemented and regulated.
The European Union has endorsed the Data Act clause to regulate smart contracts, aiming for complete transparency and adherence to EU regulations. This endorsement is a key step toward ensuring the transparency and security of transactions through smart contracts, despite potential challenges in implementation.
3. Decentralized Finance (DeFi) Innovations
Decentralized finance has been one of the most active sectors for smart contracts, and this trend is only accelerating. New DeFi applications are leveraging smart contracts to create decentralized exchanges, lending platforms, and even insurance models that operate with greater transparency and reduced counterparty risk.
Smart contracts are increasingly designed to be interoperable across different blockchain platforms. This allows for greater composability within the DeFi ecosystem, where different protocols can interact seamlessly. Such interoperability enables the creation of more complex financial services that can leverage the unique capabilities of various blockchains
Bottom Line
Used independently or integrated into dApps, smart contracts provide a fast, independent, reliable, and affordable way to transmit any sort of value online without the involvement of third parties. Smart contracts are a perfect example of how decentralization made possible by blockchain technology can improve our daily lives.
The smart contract technology has a great deal of potential, despite a few disadvantages like lack of regularity, mistakes in the code, and difficulty implementing them. The long-term benefits of using smart contracts can be implemented in various business areas, including real estate, e-commerce, supply chain, and healthcare.
