Unlike traditional contracts, smart contracts do not exist in the form of paper documents but are programmed as code on the blockchain. This ensures that the terms of the contract are automatically executed when previously agreed upon conditions are met.

So what is a smart contract and what benefits does it bring in practice? Let's explore the details with Intech Group in the content below.

1. What is a smart contract?

Smart contracts are programs stored on the blockchain platform and automatically run when pre-determined conditions are met.

Smart contracts are mainly used to automate the process of implementing the agreement, helping the parties to the contract to grasp the results quickly and transparently without the need for third-party intervention. In addition, smart contracts also help automate the workflow and trigger subsequent actions when certain conditions have been met.

2. The Origin of Smart Contract

Smart contract was created by Nick Szabo – a famous computer engineer and cryptographer. In 1997, the term “smart contract” was first introduced in one of his research papers.

Initially, Nick Szabo defined smart contract as a tool to help reduce fraud and automatically execute the terms of the contract. In his 1996 paper, he continued to expand his vision of the potential of smart contracts when applying them in many fields such as technology, finance and automated trading systems.

Nick Szabo is also known as the father of Bit Gold – a project considered the predecessor of Bitcoin, laying the foundation for the development of the cryptocurrency market and blockchain technology today.

3. How do smart contracts work?

Smart contracts operate based on “If/when...then...” conditions that have been programmed and deployed on the blockchain platform. The smart contract operation process takes place in the following specific steps:

Determine transaction conditions

Participants will determine the conditions that need to be met for the transaction to be triggered. For example: "If the customer transfers the full amount, the product will be delivered to the registered address."

Programming conditions into the smart contract

The developer will write programming code with "If/when…then…" rules and deploy the smart contract on the blockchain.

Blockchain network verifies conditions

When a condition is triggered, the network of computers (nodes) on the blockchain will perform the verification process. This process ensures that all conditions have been satisfied.

Automatically execute the contract
After the condition is verified, the smart contract will automatically perform the programmed actions such as:

• Disburse funds to the recipient.
• Send notifications to related parties.
• Register ownership or issue documents (tickets, digital contracts, etc.).

Recording and updating on Blockchain

When the transaction is completed, the status of the contract is recorded on the blockchain. This ensures that:

• Information cannot be changed or edited.
• Only authorized parties have the right to view and check the transaction results.

Building an automation process

Smart contracts can be extended and set many different rules to ensure the contract is executed accurately and transparently.

Currently, programming smart contracts has become simpler thanks to blockchain platforms that provide contract templates, web interfaces and online support tools. This makes it easy for businesses and individuals to deploy smart contracts without too much programming expertise.

>> Reference: Factory automation system

4. Benefits of Smart Contracts

Smart contracts are increasingly popular due to the outstanding benefits they bring. Here are the specific benefits:

Speed, efficiency and accuracy

Smart contracts are automated tools that help:

• Execute transactions immediately when conditions are fully met.
• Eliminate the need for cumbersome paperwork.
• Reduce errors due to manual drafting errors.
• Shorten processing time, bringing higher efficiency.

For example: In a commercial transaction, when the buyer makes a payment, the system will automatically confirm and make delivery without going through any intermediary.

Transparent and reliable

Smart contracts operate on the blockchain platform, where all transactions are recorded and shared transparently between participating parties. This ensures that:

• No third party interferes or distorts information.
• All transaction data is stored permanently and cannot be changed.
• As a result, smart contracts help build trust between participating parties without the need for authentication from an intermediary organization.

High security

Blockchain possesses strong security capabilities thanks to:

• All transaction information is encrypted and stored on a distributed ledger.
• To edit a record, hackers must intervene and change the entire blockchain - which is almost impossible.
• This makes smart contracts one of the safest transaction solutions today.

Save costs and time

Smart contracts help eliminate the involvement of intermediaries such as banks, lawyers or certification organizations. This helps:

• Minimize costs incurred during the transaction process.
• Save time processing and completing procedures.
• For example, in the real estate sector, instead of needing a notary and a bank to execute a transaction, a smart contract will automatically execute after the buyer pays and the seller confirms.

Smart Contracts bring a breakthrough in the execution of agreements and transactions thanks to their automation, transparency, security and cost savings. With strong application potential in fields such as finance, supply chain, real estate and technology, smart contracts are gradually becoming an indispensable tool in the digital age.

5. Advantages and disadvantages of Smart Contract

Smart Contract is a breakthrough technology with many outstanding advantages but still has limitations that need to be overcome. Below is a detailed analysis:

5.1 Advantages of Smart Contract

Immutable data
The immutability of smart contracts ensures that deployed data and terms cannot be modified or hacked from outside. This helps build absolute trust between participating parties.

However, if an error arises from the beginning, the developer cannot edit the smart contract but can only create a new contract to replace it.

Decentralized and self-enforcing
Decentralized: Smart contracts eliminate the need for third-party involvement (such as banks, lawyers), helping to reduce related costs and increase operational efficiency.

Self-enforcing: Smart contracts automatically execute conditions when they are met without outside intervention.

For example, in financial transactions, smart contracts will automatically disburse when the buyer makes full payment.

Applications in many fields
Although smart contracts are mainly used in the crypto market, more and more businesses are starting to research and apply smart contracts in practice.

Fields such as supply chain, insurance, real estate have tested smart contracts to reduce costs, increase work efficiency and optimize processes.

5.2 Disadvantages of Smart Contract

Data cannot be changed when an error occurs
The immutability of smart contracts is both an advantage and a disadvantage. Once a contract is deployed on the blockchain, it cannot be modified. If there is an error in the programming code or contract terms, the developer can only create a new contract.

Typical example:
In 2016, The DAO organization was attacked due to a vulnerability in its smart contract, causing the organization to lose millions of ETH. Due to immutability, The DAO could not fix the error in the contract, leading to a hard fork on the Ethereum blockchain and splitting into two new chains: Ethereum Classic and Ethereum.

No clear legal protection
Currently, smart contracts are not regulated in the mainstream legal system. When an error or dispute arises, users are not protected by the law.

Vulnerabilities in smart contracts can facilitate attacks such as:

• Rug pull (fraudulent withdrawal).

• Exploit (exploit vulnerabilities).

According to CertiK's report, attacks on smart contracts caused losses of up to 3.7 billion USD in 2022.

Smart contracts are a major step forward in blockchain technology with outstanding benefits such as immutability, decentralization, automation and increased performance. However, disadvantages such as the inability to edit when errors occur and lack of legal protection are still major barriers to the expansion and application of smart contracts in life.

To promote the potential of smart contracts, it is necessary to have solutions to fix vulnerabilities, improve security and build a suitable legal corridor. In the future, smart contracts are expected to become an indispensable tool in the fields of finance, trade and technology.

6. Smart Contracts for Manufacturing Enterprises

Smart contracts, implemented based on blockchain technology, have become a powerful tool in many industries, including the manufacturing industry. The application of smart contracts to manufacturing enterprises brings many obvious benefits and potential to optimize management processes, reduce costs, increase transparency and automate transactions. Below are some analyses of how smart contracts can be effectively applied in manufacturing enterprises:

Increasing process automation

Smart contracts help automate transaction processes in manufacturing such as purchasing raw materials, paying suppliers, or checking product quality without human intervention. This automation not only saves time but also minimizes the risk of human error, thereby improving operational efficiency.

High Transparency and Security

Blockchain technology, the foundation of smart contracts, helps store all data related to transactions in an immutable and traceable chain. This brings transparency to all transactions of manufacturing enterprises, while protecting data and transactions from forgery and external attacks.

Reducing intermediary costs

Typically, manufacturing enterprises have to work with many intermediaries such as suppliers, transporters, and quality inspection agencies. These parties often require service fees and can cause unnecessary delays. Smart contracts can eliminate or minimize the role of these intermediaries, helping businesses save costs and improve processing speed.

Efficient Supply Chain Management

Smart contracts can help track and manage the supply chain, ensuring that all steps from production, transportation to distribution are on schedule. Information about the origin of raw materials, shipping status, and product status can be automatically updated and shared via smart contracts, helping to improve the efficiency of the entire supply chain.

Enhance the efficiency of financial management and payments

For manufacturing businesses, payments to suppliers and partners are an important process. Smart contracts can automatically make payments when contract conditions are met. This not only helps to minimize errors in calculation and payment, but also helps businesses maintain good relationships with partners by ensuring timely payments.

Easily scalable and flexible

As manufacturing businesses grow, processes and contracts need to be adjusted to meet new requirements. Smart contracts can be easily reconfigured to suit changing needs, and can be extended to include new partners, suppliers, or products without having to rebuild from scratch.

Improved product quality and warranty management

Smart contracts can be used to monitor product quality during the manufacturing process. For example, if a product fails to meet quality requirements, the contract can automatically trigger corrective actions or warranty claims without human intervention. This helps businesses maintain high product quality while minimizing customer complaints.

7. Practical applications of smart contracts

7.1 Smart contracts in the financial industry

Smart contracts play a core role in decentralized financial applications (DeFi DApps), creating a trustworthy alternative to traditional financial services. With the characteristics of transparency, immutability and automation on the blockchain platform, DeFi DApp is becoming more and more popular and attracting the attention of users worldwide.

These applications provide services similar to the traditional financial industry including: lending, saving, trading and other financial services, but with many outstanding benefits such as:

• High transparency: All transactions are recorded publicly and cannot be changed.
• 24/7 operation: Users can access the service at any time without depending on bank working hours.
• Low cost: Thanks to automation by smart contracts, operating costs and intermediary fees are significantly reduced.

Thanks to the above advantages, the decentralized business model (DeFi) helps lower the barriers to entry into financial services, bringing opportunities to many users around the world. DeFi projects have attracted billions of dollars in capital flows, and this trend is expected to continue to grow strongly as more people realize its potential and benefits.

Users can participate in the decentralized financial ecosystem without the need for centralized supervision or paying intermediary fees. Although it has only emerged in recent years, DeFi and innovative DApps have proven to have a positive impact on the financial sector, opening a new era of services that are more convenient and fair for consumers.

7.2 NFTs and Smart Contracts: Blockchain Technology in the Gaming Industry

The global video game industry is now worth hundreds of billions of dollars and continues to grow at an impressive pace. However, this ecosystem still has shortcomings in the way value is created and distributed between developers and players.

Currently, the traditional model only allows game developers to create and release products, while players must spend money to access and interact with in-game assets. This value flow is largely one-way, preventing players from fully exploiting the value potential of their investments in games.

Blockchain technology combined with smart contracts has brought about major changes to the gaming industry. Specifically:

• NFT (Non-Fungible Token): Are non-fungible tokens that represent unique digital assets in games such as items, equipment or characters.
• NFTs are built on smart contract platforms that ensure uniqueness, rarity, and indivisibility. This allows players to manage ownership of their assets efficiently.

Thanks to blockchain technology, players can:

• Store and trade in-game assets with other players.
• Move assets to other blockchain-enabled games.

In addition, in-game NFTs can also hold value outside the game in which they were created. This opens up the potential to build a broader game economy, promoting the development of fair and sustainable game models.

Some prominent blockchain platforms that are supporting game development include Ethereum, TRON, EOSIO, and NEO. Smart contract and NFT-based games not only create new entertainment experiences but also expand monetization opportunities for players, while helping to shape the future of the global gaming industry.

7.3 Smart Contracts and Blockchain in the Legal Industry

One of the most potential applications of smart contracts in practice is their ability to act as legally binding contracts. Smart contracts can replace traditional contracts, providing transparency and automation in the enforcement of business commitments. This is one of the solutions that can effectively replace current legal procedures, helping to reduce costs arising from hiring lawyers or intermediaries.

Blockchain technology has spurred innovation in the legal industry, with one of the prominent examples being the advent of electronic signatures. Smart contracts are a new development in this space, and with their outstanding advantages, they may become the first choice for parties to legal agreements in the future.

Widespread adoption of smart contracts can reduce costs and speed up the execution of legal transactions. To date, several states in the United States have begun to allow the use of smart contracts and blockchain in the legal industry. For example, Arizona has allowed the creation of enforceable legal agreements through smart contracts, while California has allowed the issuance of marriage licenses through blockchain technology.

7.4 Blockchain in Real Estate

Through the process of tokenization, smart contracts are helping to promote fractional ownership of assets, thereby reducing the barriers to entry for many people. This technology improves and consolidates the real estate transaction process, helping to simplify procedures and reduce costs. Platforms such as RealT and SolidBlock have successfully tokenized real estate, opening up investment opportunities to a wider audience.

When buying a home or real estate, participants often encounter hidden costs such as closing costs, title transfers, and brokerage fees. These costs can be minimized or even eliminated entirely through the use of smart contracts. When assets are tokenized, most of the work of storing and managing records can be done through smart contracts, saving time and money for the parties involved in the transaction.

7.5 Using Smart Contracts in Corporate Structure: Building a DAO

In 2017, the State of Delaware (USA) passed Senate Bill 69, which allows businesses to be incorporated and managed using blockchain technology. This bill created an opportunity for the development of Decentralized Autonomous Organizations (DAOs), where ownership and compensation issues can be encoded into smart contracts.

DAOs use smart contracts to build corporate structures, saving on administrative costs such as office space, recruitment, and payroll. DAOs are becoming an increasingly popular model in the blockchain community, providing a novel and efficient way of managing businesses.

7.6 Applications of Smart Contracts in Emerging Technologies

One of the most exciting applications of blockchain technology and smart contracts is their ability to support complex computational tasks in fields such as machine learning (ML) and artificial intelligence (AI). Combining the powerful data processing capabilities of AI with the security and immutability of blockchain promises to create smart contracts that are automatically established and executed through AI technology.

As smart contracts are deployed across various industries, they will become increasingly complex and more relevant to each field. AI can help build more complex, responsive, and more useful enterprise-level smart contracts and DApps.

Smart contracts can leverage AI's advanced computing capabilities and adaptive systems to automate complex processes, while providing a safe and secure environment for sensitive and valuable machine learning data.

These are just a few typical examples of smart contract applications. In addition to the fields mentioned above, smart contracts also benefit the healthcare industry, solve problems in the Internet of Things (IoT), and many other fields.

See also:

• What is Metaverse?

• What is IOC?

• Smart factory