What Are Smart Contracts and Why Do We Need Them?

Everything seems to be getting smart these days. It shouldn’t surprise you, then, that contracts are not an exception. But what are smart contracts, why do we need them, and how do they stack up against traditional pen-and-paper agreements? If you’re one of those who don’t stay stick to old established patterns, then the time has come for you to explore the promise of smart contracts technology. Here’s a walkthrough of what smart contracts are and how you can benefit from doing business on the blockchain.

Icing on the blockchain cake

What Are Smart ContractsSmart contracts (otherwise known as self-executing or blockchain contracts) are growingly proving that they have what it takes to provide tangible business value. If you’ve read our primer on blockchain technology and its potential uses, you know how its disruption is affecting different industries. Now if blockchain is a cake, smart contracts are the icing on top of it.

Ever since blockchain graced the tech world with its presence, smart contracts have been its most ground-breaking killer app. In fact, they have rapidly become a must-have innovation for businesses. This amazing piece of technology allows you to conduct transactions, make transparent deals, automate processes, exchange money, property, or anything of value – all without lifting a finger.

Smart contracts vs traditional contracts

What Are Smart ContractsWe sign many different types of deals throughout our lives, be it a mortgage, a purchase and sale agreement, or any other legal document. But why do we even need contracts in the first place? Well, obviously, people simply want some kind of reassurance that the other party will keep their end of the bargain. This is where contracts really come in handy.

The problem, though, is that drafting a written document takes a lot of time, paper-shuffling and probably a roomful of legal eagle lawyers (who don’t come cheap). We go to the hassle of detailing every term and condition of the agreement, only to find out later that it has become a source of business conflict. Argh!

As if that wasn’t enough, as trading and transactions are moving into the Internet realm, traditional deals just don’t work anymore. Many online arrangements occur between anonymous parties, and you never know if a seller won’t run away with your money. Now blockchain contracts are decidedly ‘smarter’ than their old-fashioned paper-based predecessors, making the whole process a lot less of a burden.

Agreements with superpowers: what are smart contracts?

What Are Smart ContractsSuppose you had a legal agreement that could ‘understand’ and execute its own terms. Instead of writing a contract on pen and paper, you simply code it, and it makes transactions or sends products according to specified conditions and time frames. This is the world of smart contracts. These pieces of software can automate a good deal of the contracting process. And it’s all thanks to their ultimate ‘superpowers’.


Blockchain contracts allow people to credibly bind themselves by setting a deal up as digital code. Participating parties agree on the terms of the agreement, sign it digitally and push it to the blockchain. The contract is now supervised by the network of computers and so can’t be changed or modified.


Smart contracts allow assets to be transferred between parties. Let’s say, you need to pay $20 for some service at the end of each month. You define these terms in a self-executing agreement, and it does the rest of the job for you. The contract ‘remembers’ to transfer funds on the very date specified, just like clockwork.


These digital agreements run automatically, without anyone intervening and telling them what to do. They are programmed to trigger transactions once certain predefined conditions are satisfied. The ‘If/Then’ principle also implies that obligations are attached to the contract. So, if a supplier fails to deliver on their promise, a client doesn’t pay. If contract requirements are not met, it charges a penalty fee or terminates a service. What’s more, smart contracts have an escrow service built in. When buying a property, money and the ownership right are both stored on blockchain and will pass to the seller and the buyer at exactly the same time.


This one is a biggie! The strongest link of every business relationship is trust. Because there’s often a lack of it between parties to a deal, we traditionally need the oversight of reliable intermediaries. Smart contracts can also establish trust, but there’s an interesting twist to them. The thing is, they can perform middlemen functions themselves. Everything that estate agents, credit companies or banks do, can be pre-coded into a smart contract. As goods and services can now be traded in a fair way, trust is no longer an issue, and there’s no need for third parties, expect to save big money on deals. No more expensive lawyers or go-betweens!

But what’s this Ethereum thing?

What Are Smart ContractsYou probably couldn’t help but notice that Ethereum, which is behind smart contract technology, has now joined the hype mania. But what do we know about Ethereum smart contracts and how are they ‘smarter’ than the usual ones?

Bitcoin was the first to support basic smart contracts, but it only allows for peer-to-peer payments between users. Ethereum is a totally different beast. It took the utility of Bitcoin to the next level by implementing programmable contracts that can be simple or complex, depending on what they are designed to do. Unlike Bitcoin, Ethereum is not limited to the currency use case only. It’s a platform that allows decentralized apps (Dapps) to be built on it. Ethereum replaces Bitcoin’s restrictive coding language with its very own Solidity. This programming language is Turing-complete, which is tech jargon for “it can do pretty much everything”. To top it all off, in the Ethereum protocol, not only the parties involved can see the contract, but the transaction is witnessed and validated by hundreds of people. If someone you deal with goes back on their word, you know the entire community will stand up for you.

So, to recap, Ethereum smart contracts are pretty much the answer to “why do you need Ethereum when you have Bitcoin?” They are really like night and day, that’s why!


These are exciting times we live in! We may still be at the dawn of smart contracts technology, but programmable agreements are already proving to be a viable alternative. If blockchain contracts fulfill their promise, perhaps one day we will wake up to the world free of middlemen and commission.

Smart contracts will stir upheaval in business, no doubt about it. The question is, will YOU join the mix? If it’s a “yes”, we are here to help you set your business on the right track. If you dream it, you might be able to blockchain it!


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About Skelia

Skelia, a Nortal company, is an international leader in building cross-border IT and engineering organizations and affiliate companies in Eastern-Europe. For over a decade, we have provided staff augmentation services to a diverse range of clients—from start-ups to Fortune 500 companies. We operate in Luxembourg, the UK, the Netherlands, Ukraine, Poland, and the US.