Smart contracts: everything you need to know about automated contracts on the blockchain

The blockchain, which came into being with Bitcoin, has developed to support much more than simple cryptocurrency. Built on the blockchain, smart contracts make it possible to conclude agreements and carry out transactions securely, without the need for an intermediary such as a bank or a lawyer. But what are the benefits and challenges of smart contracts, and how exactly do they work?

What is a smart contract?

A smart contract is a computer program that automatically executes the terms of a contract as soon as certain predefined conditions are met. Unlike a traditional paper contract, which requires the involvement of a third party (notary, lawyer, judge, etc.), a smart contract works without an intermediary, in a transparent and tamper-proof way.

The technology that makes this possible is the blockchain. The latter can be compared to a large digital ledger, shared and secured, in which all transactions are recorded chronologically and permanently. Each piece of data entered in the blockchain is timestamped, verified by a network of computers, then frozen: it can no longer be modified or deleted.

Smart contracts are therefore programs hosted on this blockchain. Once online, they execute automatically as soon as the specified conditions are met, and cannot be stopped or modified. For example, a smart contract can be programmed to transfer a sum of money to a person as soon as a parcel is confirmed as delivered.

This mechanism offers guarantees of reliability, speed and transparency that are very attractive to businesses, particularly in fields such as finance, logistics, insurance and real estate.

How does a smart contract work?

As we saw above, a smart contract works like an autonomous program that automatically carries out actions when a set of predefined conditions is met.

In practical terms, a smart contract is written in a programming language specific to the blockchain. It contains instructions of the type “if such-and-such an event occurs, then such-and-such an action is triggered”. For example: “if payment is received, then transfer the title deed”. This code is then deployed on the blockchain, which makes it transparent, traceable and unalterable: no one can modify it any more, not even its creator.

Smart contracts rely on conditional logic, similar to that used in spreadsheets (such as Excel) or algorithms. This is known as an “if/then” structure. As soon as the conditions are met, the contract executes without human intervention. For example, in an automated travel insurance contract, a refund can be triggered automatically if the flight is cancelled, using data from an external service.

Once the conditions are met, the smart contract executes automatically and irreversibly. This automation removes delays, reduces the risk of human error, and eliminates the need for intermediaries. On the other hand, it is essential to design the contract rigorously, because a coding error could lead to unintended consequences.

What are the advantages of smart contracts?

The first advantage is obvious: everything happens automatically, with no manual action required once the contract has been launched. This reduces delays, speeds up transactions and avoids administrative back-and-forth.

A smart contract works exactly as it was coded. There is no room for misinterpretation. By eliminating intermediaries (notaries, lawyers, banks, etc.), errors, delays and the costs linked to manual verification are limited.

Smart contracts are hosted on the blockchain, which guarantees their immutability. Once published, they can no longer be modified. All transactions are visible and traceable by the parties concerned, which strengthens trust in the system.

Fewer intermediaries, less paper, fewer procedures… The smart contract lowers operating costs. This financial efficiency makes it a strategic tool for businesses, particularly in sectors such as logistics, finance and insurance.

Thanks to the decentralised nature of the blockchain, smart contracts can be used anywhere in the world, without geographical or administrative barriers. This is a major opportunity for international trade and cross-border collaborative projects.

Limits and risks of smart contracts

While smart contracts offer many advantages, they also carry risks. Their main asset, automatic execution, is also their greatest weakness, because everything rests on the code. A programming error, an oversight or a misinterpretation of the clauses can have irreversible consequences. Unlike a paper contract, it is not always possible to correct or amend a smart contract once it is on the blockchain.

A smart contract knows neither nuance nor flexibility. In an exceptional situation or a dispute, it cannot interpret the intentions of the parties. This can be a problem in complex cases that would normally require the intervention of a judge or a mediator.

Even though the blockchain is highly secure, smart contracts remain vulnerable to bugs or attacks if the code is not written correctly. Some well-known hacks have led to losses of several million euros.

Finally, the legal status of smart contracts is not yet clearly defined in most countries. Can they replace a legal contract? Do they have legal value? What happens in the event of a dispute? This lack of a legal framework may hold back their adoption.

Use cases for smart contracts

Smart contracts are already used in many sectors to automate transactions, guarantee transparency in exchanges and reduce intermediary costs.

Decentralised finance (DeFi)

Decentralised finance is the favourite playground of smart contracts. Thanks to them, it is possible to execute financial operations automatically without going through a bank or a central institution. Loans, savings, cryptocurrency exchanges and derivatives are thus managed by lines of code. These smart contracts allow users to interact directly with one another, 24/7, while securing the funds deposited.

Supply chain

In logistics and the supply chain, smart contracts guarantee the traceability and transparency of exchanges. Each stage (production, transport, delivery) can be recorded and verified in real time on the blockchain. For example, a smart contract can automatically trigger payment to a supplier as soon as the goods are scanned on arrival. This reduces disputes and smooths relations between partners.

Parametric insurance

In the field of insurance, smart contracts make it possible to create automated contracts based on external data. This is known as parametric insurance. For example, in the event of extreme weather conditions (storm, drought, flight delay), the smart contract checks the data from an oracle (a reliable source of information) and automatically triggers compensation for the policyholder. This speeds up reimbursements and reduces administrative costs.

Intellectual property

Artists, musicians and creators can use smart contracts to manage copyright and automate remuneration. Each time a work is used (a track is listened to, an image is reproduced), the contract can distribute the revenue among the rights holders according to predefined rules. It is also an effective way of proving the prior existence of a creation, since the blockchain provides a tamper-proof timestamp.

Why integrate smart contracts into your entrepreneurial project?

Smart contracts are a strategic asset for entrepreneurs seeking agility, transparency and automation. When built into a project from the design phase, they make it possible to build more efficient and scalable business models. Whether to secure transactions, make a business relationship more reliable or create an innovative digital product, their potential is immense. Thanks to their self-executing nature, they reduce delays, minimise the costs linked to intermediaries and establish an immediate relationship of trust with partners or customers. In a world increasingly turned towards digital, integrating them into your strategy can become a decisive competitive advantage.

To learn how to handle these technologies and build innovative projects around them, EDC Paris Business School offers the Master in Entrepreneurship & Innovation, a comprehensive programme focused on the creation, management and development of new business models.

Other programmes can also enable you to explore the potential of emerging technologies applied to finance, data or logistics: the Master in Data Science & Business Analysis, the Master in Corporate Finance or the Master in Supply Chain & Strategy, all offered by EDC to train the managers of tomorrow to be both visionary and operational.

Smart contracts are set to become a fundamental technology for the next era of digital transformation. They transpose the age-old concept of the contract (a promise controlled and enforced by law) into the realm of computer code. If the current trend continues, “smart contracts” are likely to account for a growing share of global transactions, paving the way for a world in which agreements will be executed with all the precision and reliability of digital technology.