What are Web3 Contracts? Smart Contracts Explained

Smart contracts, the offspring of fledgling distributed ledger technology, are a new legal disruptor, but what are they, and how do they fit in with traditional contracts? Let’s explore.

Ostap Zabolotnyy
Ostap ZabolotnyyMarketing Manager
What are Web3 Contracts? Smart Contracts Explained

The rise of distributed ledger technology has primarily been responsible for introducing a new term into the legal lexicon: "smart contract" – a legally enforceable contract in which some or all the contractual duties are defined and performed automatically by a computer program. 

Smart contracts are considered self-executing, less expensive, dependable, transparent, secure, borderless, and less reliant on attorneys and legal teams than traditional contracts. 

This article will explain what a smart contract is and why brands should be aware of them. 

What are Web3 Contracts? 

Web3 contracts, or smart contracts, are online agreements between two or more parties. Web3 contracts are also the backbone of the Web3 sector, and the blockchain-driven internet is built on them. 

Contracts in the Web3 format are self-executing agreements. They use code to implement such agreements rather than relying on third parties or expertise. These digital contracts make buying, selling, and exchanging assets possible. You can also trade other currencies, tokens, or property types with Web3 contracts. 

Furthermore, such contracts make these transactions visible on the blockchain. The terms of a smart contract agreement are part of the code itself because they are entirely digital and programmable. Furthermore, because these contracts are programmable, they can be unique and personalized regarding incentive systems, regulations, and punishments. 

How do Smart Contracts Work? 

Smart contracts operate by executing basic "if/when...then..." phrases typed into code on a blockchain. When preset circumstances are met and validated, a network of computers executes the actions. These activities could include transferring payments to the appropriate parties, registering a vehicle, providing alerts, or issuing a ticket. 

When the transaction is completed, the blockchain is updated. This means that the transaction cannot be modified, and the results are only visible to parties who have been granted permission. 

Use Cases of Solidity Smart Contracts 

Solidity smart contracts provide a significant competitive edge because they allow you to construct dApps on Ethereum.  

But what exactly are Solidity smart contracts? 

Smart contracts are self-executing bits of code that would enable two or more parties to make and enforce agreements. On the blockchain, such codified contracts exist, and as a result, they are preserved in an irreversible public record.  

The code contains the terms of the agreement. Solidity, Ethereum's core language, was the first smart contract language ever created. As a result, it is a critical pillar of the rapidly expanding dApp and Web3 ecosystem. 

The following are some of the fascinating Solidity smart contract application cases: 

Financial Services 

Smart contracts offer a wide range of applications in the banking and finance industries. Smart contracts can be programmed to represent and enforce the rules regulating a financial product or service. Furthermore, they can help with automated payments, transactions, settlements, and claims. They can also develop blockchain-based mortgages, bonds, foreclosures, and loans. 

  • DeFi dApps 

DeFi (decentralized finance) dApps provide fresh alternatives to traditional money while also breaking down conventional financial restrictions. Furthermore, they enable the "underserved" to access financial services even if they do not have a bank account. Unlike traditional platforms, they provide financial services 24 hours a day, seven days a week, with most transactions settling in real-time. 

Moreover, the ability of Solidity smart contracts to innovate allows them to include new functionality and benefits. Likewise, to entice customers, such platforms typically provide greater interest yields. They are also borderless and do not rely on centralized custody or fees. 

Digital Identity 

In terms of digital identification, smart contracts offer several intriguing applications. While it is still not viable to conduct many online transactions anonymously, especially in regulated situations, Solidity smart contracts provide new options. They present one-of-a-kind solutions that offer speed, convenience, and data security. 

Furthermore, in circumstances where reliable identity confirmation is required, Solidity smart contracts can add privacy layers or features. 

  • Solving Identity Theft and Data Monopoly 

Solidity smart contracts offer a new approach to managing personal data without relying on a centralized database by providing users of Ethereum dApps with self-sovereign identity. Instead, critical information (such as passport information) is stored on the Ethereum blockchain and may only be accessed via the dApp. 

Smart contracts tackle the problem of data monopoly wielded by large institutions by disintermediating identity databases. Furthermore, smart contracts provide users with more control over their personal information. As a result, they can help to reduce the vast multibillion-dollar problem of identity theft. 

  • Applications of Digital id in IoT 

Solidity smart contracts play an essential part in the cutting-edge "internet of things" sector. For transactions to take place, connected machines must correspond to accounts. As a result, smart contracts provide a bridge for facilitating confidence across machines in the Internet of Things. Furthermore, Solidity smart contracts can create identity-based relationships between devices. 


DAOs, or decentralized autonomous organizations, are undoubtedly something you've heard about. DAOs serve as the foundation for the decentralized governance of numerous organizations. Enterprises can now use solidity smart contracts and blockchain technology to create a new management structure. 

Furthermore, some governments have passed DAO legislation, allowing DAOs to run many forms of private companies without fear of sanctions or compliance. Surprisingly, Solidity smart contracts may be used to create ownership and compensation arrangements. Furthermore, such frameworks can incorporate corporate structures and legally impose incentives within a firm. 

Legal Applications 

Smart contracts may appear to threaten the legal profession based just on their name. Can Solidity smart contracts, on the other hand, automate the law? Traditional law and blockchain technology appear to be coexisting in the future. 

Solidity smart contracts could become legally enforceable in the same manner that traditional legal contracts are. Because we now use e-signatures in binding agreements, it's only a matter of time before these agreements are fully automated using smart contracts. Smart contracts can be customized to imitate aspects of any legal contract. If regulatory organizations and governments accept such smart contracts, they have the potential to boost transaction speed and reduce administrative expenses significantly. 


Tokenization is a typical application of Solidity smart contracts. Surprisingly, one use case gives rise to a slew of others. Tokens can be used to represent any form of value or transaction. Their most common application remains in the realm of cash or stable coins. They can, however, be used to represent fractions of an actual or digital item. They have significant uses in real estate, where they can represent ownership of real estate assets. 

They have fascinating applications in the world of NFTs as well. NFT fractionalization is the process of dividing and selling creative digital assets as tokens. 


The gaming business is the most popular application of Solidity smart contracts. Gaming has become more entertaining and profitable for many users because of the growth of NFTs and NFT marketplaces. Establishing an NFT marketplace with Solidity smart contracts has never been easier. As a result, avatars, unique items, and other gaming assets can command a premium. Furthermore, they can be used in a variety of games. 

NFTs facilitate player ownership, identity, and the immutability of a player's transactions within a game. Furthermore, they provide tokens features like scarcity or rarity. As a result of their digital uniqueness, they can increase game objects' value. They can also help with interoperability with other platforms. As a result, you may quickly transfer any NFT object you own to another NFT game. 

Advantages of Smart Contracts 

What are the advantages of using Smart contracts for users? These contracts introduce new ways to transact online without the need for an intermediary due to their decentralization features (trust lessness). They're also self-contained, precise, uninterrupted, and cost-effective. 

“Smart contracts represent a significant advancement in business process and automation. We expect them to significantly impact the economy by making it easier for enterprises to connect their key activities peer-to-peer. Smart contracts can be used in various ways, including trading, investing, borrowing, voting, health care, and real estate." - said Mitchell Amador, CEO, and founder of Immunefi. 

Let’s have a detailed look at its benefits. 

Speed, Efficiency and Accuracy 

The contract is immediately executed when a condition is met. Because smart contracts are digital and automated, there is no paperwork to deal with and no time wasted correcting common mistakes when filling out forms manually. 


Transaction records on the blockchain are encrypted, making them exceedingly difficult to hack. Moreover, because each record on a distributed ledger is linked to the entries before and after it, hackers would have to alter the entire chain to change a single record. 

Trust and Transparency 

There is no third party engaged, and encrypted records of transactions are exchanged between participants; there is no need to question if the information has been manipulated for personal gain. 


Smart contracts prevent the need for mediators to perform transactions and the associated time delays and expenses. 


All blockchain-stored documents are duplicated many times, allowing originals to be restored in the event of data loss. 

Limitations of Smart Contracts 

Businesses can use smart contracts in various ways, but they have restrictions that must be considered first, just like any other technology. 

Difficult to Change 

Changing smart contract procedures is hard, and any errors in the code can be time-consuming and costly to fix. 


A smart contract's flexibility can also be a problem. Legal experts find it challenging to apply logic-based terminology to specific contracts. Traditional contracts have a subjective element, with phrases like "good faith" and "fair" being used to allow flexibility. These relational contracts differ from transactional contracts, and it may be challenging to develop smart contracts that can offer such flexibility programmatically. 


Although smart contracts aim to eliminate third-party involvement, this is not practical. Third parties play different responsibilities than they do in traditional contracts. For example, lawyers will not be required to prepare individual contracts; however, developers will need to comprehend the rules to create codes for smart contracts. 

Vague Terms 

As contracts contain terminology that is not always understood, smart contracts are not always capable of dealing with ambiguous terms and circumstances.

"Smart contracts are immutable. This means there are no take-backs once a contract has been executed. There is no redress available through external means such as the courts. Humans write the code for smart contracts, and a smart contract is only as good as its code. Poorly written code beneath a smart contract can be vulnerable to outside exploitation. For example, smart contract hacking has recently resulted in the theft of considerable amounts of digital currency." 

According to attorney Tal Lifshitz, a partner and co-chair of the cryptocurrency, digital asset, and blockchain group at Miami-based Kozyak Tropin & Throckmorton. 


Smart contracts can be used for various transactions and give high reliability, security, and accessibility across borders. 

A growing number of people are interested in blockchain technology. Smart contracts will be used by businesses more widely in the near future. The first significant step toward achieving a flawless smart contract is maturity. Understanding how smart contracts function, how they're made, and what they have in common with regular contracts can help brands make the most of them while avoiding their drawbacks.

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