Smart Contracts 101

A breakdown on what smart contracts really are – and how they work.

Even if you’re relatively new to the wild frontier that is Web3, there’s a good chance that you’ve heard the term “smart contracts.” After all, smart contracts play an essential role on the blockchain when it comes to conducting secure transactions. 

But since you’re here, I’d be willing to bet that you have more than a few questions about the particulars. And luckily for you, I’ve got the answers. 

So without further ado, let’s take a crack at some of the most asked questions about smart contracts… 

What is a Smart Contract?

Smart contracts are defined as “self-executing contracts based on terms agreed by the parties involved.” But unlike your garden-variety agreements, the terms of a smart contract are written into lines of code that run on a blockchain. 

Think of a smart contract as an extension of the basic idea behind decentralized cryptocurrency platforms – conducting automated and decentralized transactions without the need for an intermediary. Because smart contracts act independently of any involved parties, they enable trusted digital transactions to take place without the need for oversight by any central authority. 

Smart contracts not only make digital transactions more manageable and trustworthy, they also offer enhanced security and reliability due to three key features:

  • Distributed. Contracts on the blockchain are replicated into the thousands of nodes in the network. There is no single point of interaction, manipulation, or failure of the contract, which makes it difficult (though not impossible) to hack or mismanage. 
  • Transparent. Like all transactions on the blockchain, smart contracts are visible to anyone on the network.
  • Immutable. Once a smart contract is on the blockchain, its terms are set and unchangeable.

Who Invented Smart Contracts? 

Believe it or not, the concept has been around for well over two decades. Smart contracts were first proposed in 1997 by Nick Szabo, a computer scientist, law scholar and cryptographer who conceptualized the idea of using cryptography for creating and storing contracts. 

Szabo also developed the concept of a virtual currency known as Bitgold in 1998, more than 10 years before the creation of Bitcoin. And although Bitgold didn’t experience the same success its descendants did, Szabo’s concept of smart contracts have played a fundamental role in the current functionality of the blockchain. 

How Do Smart Contracts Work? 

The easiest explanation is the one posed by Szabo himself who famously likened a smart contract to a vending machine. 

Let’s say you buy a soda that costs 25 cents from a vending machine. If you put a dollar into the machine and make a selection, the machine will do one of three things: give you your chosen drink and 75 cents in change, prompt you to make another selection if your choice is sold out, or refund your money. This is a very simplified version of a smart contract. 

The vending machine’s programming enables it to provide the user with a particular outcome, without the need for a human intermediary. Contracts on the blockchain serve the same essential purpose, but with a much higher degree of versatility. 

Smart contracts began as simple if/then statements created and implemented by programmers, but over time they’ve become far more sophisticated. Today a smart contract can have numerous different conditions and terms. These can include who can interact with the contract, at what time, and which inputs determine which outputs. There are also multiple languages (Solidity, Web Assembly, Michelson, Plutus, etc.) for smart contracts which creates greater accessibility for those who aren’t coding experts. 

Are Smart Contracts Legally Binding? 


Despite what the name implies, a smart contract is NOT a legally-binding contract. It simply executes the predetermined functions once the contractual terms have been met. In essence, they’re just an automated transaction process that reduces the likelihood of error or fraud. 

However, if you want to take legal steps to link the smart contract to a legally-binding agreement between parties… Well, that’s your prerogative, my friend – no legal advice here; only information.  

What Are the Benefits of Smart Contracts? 

The simple fact is that the world runs on contracts – whether it’s between businesses, governments or individuals. But traditional contracts require a lot of time to manage, maintain, not to mention the possibility of an expensive dispute. So having a smart contract that can guarantee a particular outcome without a human intermediary is more or less a no brainer. 

In a nutshell, the advantages are:

  • Accuracy. The programmed terms and outcomes will be performed accurately, guaranteed. 
  • Trustless. There’s no need for the involvement of pesky (re: greedy) middlemen
  • Autonomous. The code is self-executing and works upon fulfillment of the terms. 
  • Cost-effectiveness. They can eliminate the need for expensive litigation or legal proceedings. 
  • Security. As part of the blockchain the contract is cryptographically protected (though, again, not impervious to hackers) 
  • Fast. Smart contracts are executed as soon as the terms have been fulfilled. 

The Rundown

Smart contracts are essentially just code that lives on the blockchain, but their potential for real-word applications is enormous. In fact, they are already becoming a go-to practice in many banks and insurance organizations in their daily operations. 

We may have a ways to go before smart contracts become an integral part of real-world practices, but it’s safe to say that they’re here to stay – and it’s only a matter of time before paperwork and middlemen become a thing of the past. 

Smart contracts are an integral part of the fair music ecosystem we’re building at NEWM. To find out more about how we’re using smart contracts to empower musicians – check out our whitepaper. 

About the Author

Macyn Hunn

Macyn Hunn is the designated copy and content writer for NEWM, with nearly a decade of experience writing sales and marketing copy for companies ranging from startups to multi-million dollar enterprises. A born writer and Texas-native, she made the decision to move to the Middle East (at the befuddlement of her family) in 2016 in pursuit of culture, adventure, and of course, a good story – and she found it. She currently lives in Jordan with her husband.


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