Smart Contract and DApps: what they are and how they work

4 min

Contract and law walk side by side. An initial agreement always needs guarantees. In a traditional contract, the guarantees are usually lawyers and notaries. Smart Legal Contract and Smart Contract Code-Base might be the solution where intermediaries are not required. Let’s take a look at what they are and why they might be useful.

What are Smart Contracts?

Smart Contracts are computer protocols that manage transactions in a pre-programmed and automated way. Within them are all the contractual clauses and, when certain conditions occur between the parties, they are executed without waiting for the action of an intermediary.

An example? I need to insure machinery that I rarely use because it is not essential to my production process. I want insurance that only kicks in when the machine is in action. That’s why I can choose to use a programmed smart contract that contains the clauses of the insurance policy.

Smart contracts are activated in a similar way to traditional contracts. If we take our example and the insurance company has an app, all I have to do is: start the app; enter my data; choose the policy and the duration; read the clauses and press enter.

From that moment on, the smart contract is activated. The first step is related to the economic transaction that from my account is sent to the insurance company. All the steps follow a logic that answers to “if this happens you do that”. Therefore, the smart contract contains all the clauses (rules) established by the parties. Based on what happens, it also automatically triggers an action.

What is the advantage? That the transaction will be transparent, immutable, secure, consensual, programmable, autonomous and above all decentralized. All features guaranteed by the blockchain platform that contains the Smart Contract. Let’s try to understand the connection between these two technologies.

What are Smart Contracts? They are computer protocols that manage transactions in a pre-programmed and automated way. Share on X

If you are interested in further exploring the impact and implications of such technologies in the near future, I suggest reading the book ‘Toward a Post-Digital Society: Where Digital Evolution Meets People’s Revolution’. This book provides a detailed analysis of how these innovations are influencing society and the global economy.

Blockchain and Smart Contract: what is the connection?

Today, when we talk about Smart Contract we immediately think of Ethereum or other Distributed Ledgers Technology platforms. Actually, the intuition came to Nick Szabo’s mind in 1994 long before Satoshi Nakamoto invented Bitcoins.

However, it is thanks to Blockchain platforms that smart contracts have taken on greater importance. The reason for this is inherent in its characteristics: it serves to execute automated processes that involve a series of steps; moreover, all parties to the contract can inspect the code and obtain a visible trace of it; finally, they are deterministic like the logic of blockchain technology.

The platforms on which blockchains can be created and stored are secure because they are decentralized. Transactions take place without intermediaries. The entire process is tracked by code and every transaction has a digital value.

These features meet two needs. On the one hand, with Smart Contracts, we can turn the clauses of a contract into a code with which software is programmable. On the other, we have a platform that allows: certification of transactions; the use of cryptocurrencies; no intermediaries; and programming through decentralized apps (DApps).

This is why the blockchain has expanded and improved the use of Smart Contracts. Let’s look at the legal and application aspects.

Smart Legal Contract and Smart Contract Code Base

Apps-based Smart Contracts

Smart Contracts are secure, depending on the platform on which they are placed, and can also have legal value. They differ from code-based Smart Contracts, which we’ll see later, because:

  • they have a predetermined form for that type of contract;
  • the electronic signature must go through the Trust Service Provider (TSP), i.e. the qualified certification authority in the European Union;
  • and finally, the contract is immutable.

What are the other forms of smart contracts?

The other digital agreements fall under Code-Based Smart Contracts: i.e., those used to manage business processes within or between organizations.

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We can further divide them to identify their differences, into:

  • DAO (Decentralized Autonomous Organization): i.e., an organization in which decision-making power shifts from the central government to individuals (e.g., shareholders). Self-management is enabled through IT transposition of all internal rules. The goal is to ensure transparency of processes and decentralized, autonomous power. Smart contracts are then used to manage transactions and execute all commands related to the pre-established rules. Rules and records will then be stored through Blockchain technology.
  • DApps (Distributed or Decentralized Apps): like all applications, these also serve to perform pre-programmed actions that operate on a distributed computational system. They work in a Peer-to-Peer (P2P) environment and store data by leveraging Blockchain technology. Their purpose is precisely to integrate smart contracts with blockchain platforms.
  • Smart Contracts for Internet of Things (IoT): they are used to secure business transactions that take place by leveraging the connections of IoT devices. Connected devices generate a flood of data that in part leads to the automatic execution of the clauses established by that active smart contract but can also serve to trigger future steps. The information could, for example, indicate that an action has occurred that falls under the clause of another smart contract that is activated and this will increase the speed of the flow of actions.