Definition
A smart contract is a self executing program stored on a blockchain that automatically enforces the terms of an agreement when predefined conditions are met. They remove the need for intermediaries by recording transactions securely and transparently on a decentralised ledger.
For example, a smart contract can release payment to a supplier once goods are delivered and confirmed, without requiring manual approval.
Advanced
Smart contracts run on blockchain platforms such as Ethereum, where execution is validated by the network. They use consensus mechanisms and gas fees to manage computational costs. Security practices include audits, formal verification, and access control to prevent vulnerabilities.
Advanced uses include linking smart contracts with oracles to access off chain data, enabling decentralised finance, tokenisation, and automated supply chain settlements. Enterprises also adapt smart contracts for compliance, private blockchains, and multi party agreements.
Why it matters
- Automates agreements to reduce costs and delays.
- Provides transparency with immutable records.
- Reduces disputes and counterparty risk.
- Enables innovation in finance, identity, and logistics.
Use cases
- Escrow payments that release on delivery confirmation.
- Tokenisation of assets and royalty distribution.
- Automated vendor settlements in supply chains.
- Parametric insurance with event based payouts.
Metrics
- Number of smart contract executions.
- Total value settled through contracts.
- Average gas cost per transaction.
- Security audit coverage and resolution times.
Issues
- Code flaws may cause irreversible losses.
- Oracle dependencies add new risks.
- Complex regulation for digital assets.
- Limited scalability in some blockchains.
Example
A travel insurer uses a smart contract to automate flight delay compensation. If flight data shows a delay beyond the agreed threshold, the contract releases payment instantly to the customer.