What Is A Smart Contract, And Why Is It Important In Web 3.0?

Smart contracts automate the execution of agreements and ensure that all participants can discover the outcome as soon as possible.

What is a Smart Contract, and Why Is it Important in the Web 3

In order to understand the smart contract and why it is important to Web 3.0, one must first understand the evolution of the internet from Web 1.0, to Web 3.0.

Since its first introduction in the early 1980s, the internet has greatly evolved thanks to several adaptations and improvements, beginning with Web 1.0.

The first iteration of the web doubled as the first commercial web, and was initially implemented in the early 1990s. Sadly, despite bringing an array of advancements to the nascent internet, it was also laden with hindersome limitations, including its status as being “read-only” at the time; part of this was the implication that users could only consume content in text form.


Years later, there was a need to go back to the drawing board, and the innovative academics of the time brainstormed ways to further develop the internet, culminating in the use of HTML, CSS, and JavaScript, which formed the basis of the development of Web 2.0. 

This second iteration of the web came with several advancements, bringing with it many of the opportunities that were missing from Web 1.0. More so, unlike Web 1.0, which focused mainly on transmitting “read-only” information, Web 2.0 centered more around user interactions on the internet, adding visuals and enabling worldwide digital/social connectivity. 

With Web 2.0, the average user can produce as much content as desired, while also being able to share and commercialize it. However, as good as that may sound, this format of the web, like its predecessor, still lacks vital elements.


Of particular note, online interaction, content creation, and uploading, as well as the ability to earn from the entire process, still largely depend on centralized systems that are predominantly controlled by the Big Tech giants. 

For instance, Web 2.0 users generally rely on giant companies like Facebook and Google for a great many things, including content publication, marketing, and revenue generation. Likewise, since these companies have complete control over the data their users provide, they are able to monopolize their offerings, while simultaneously limiting decentralization. ultimately, dissatisfaction with this status quo led to the birth of Web 3.0.

The major aim of Web 3.0 is to break the dominance held by this handful of players from the previous iteration by replacing the centralized server-client infrastructure used in Web 2.0 with a decentralized computer network. The overall vision of Web 3.0 is to wrestle control from the big tech companies who act as intermediaries, and completely excise them from the picture.  

In other words, pioneers within Web 3.0 want to create a decentralized internet that is free from the shackles of corporations and conglomorates. As such, it relies heavily on the presence of blockchain technology at its core. Instrumental to the success of the infrastructure of this rapidly emerging decentralized web, is the smart contract, which will be the focus of the discussion moving forward.

What Is a Smart Contract?

The term “smart contract” was originally coined by Nick Szabo, a digital scientist and cryptographer primarily known for his research in digital contracts and digital currencies, and also for his invention of a virtual currency called “Bit Gold” in 1998. 

In 1994, Szabo came up with the idea of a smart contract, and even wrote a book on the matter, titled ‘Smart Contracts: Building Blocks for Digital Free Markets‘. However, since blockchain technology was non-existent at the time, there was no room for the idea to be put into practice.

Fast-forward to 2009, and Bitcoin launched with the first documented use of blockchain technology, and in 2015, Ethereum was founded, bringing with it the introduction and implementation of the first working smart contract.

In his definition, Szabo described Smart Contracts as tools that formalize and secure a computer network by combining a protocol with a user’s interface. In simpler words, smart contracts automate the execution of agreements, and ensure that all participants can view the outcome as quickly as possible, without the involvement of an intermediary.  

Importantly, smart contracts are self-executing contracts in which the buyer and seller agreements are documented and embedded directly into lines of code. The adoption of smart contracts serves to make transactions traceable, transparent, and irreversible.

It is for these reasons that the role smart contracts play in the blockchain ecosystem cannot be overemphasized; they serve as the backbone of the Web 3.0 ecosystem, and enable users to interact online, leveraging blockchain as the main driver.

Truly emphasizing this is the fact that most interactions occurring on decentralized apps (dApps) between users and the system are powered by smart contracts, which are also responsible for the automation of most blockchain protocols.

With decentralization being one of the biggest offerings in the advancement of Web 3.0, smart contracts help set the condition for decentralized transactions, without the need for a centralized third-party or intermediary for verification purposes.

Smart Contract Variables

To understand how a smart contract can be drafted, the basic variables of a smart contract can be broken down into three key outlines:

1. Parties involved in the transaction

2. Types of assets exchanged

3. Conditions of the transactions

How Do Smart Contracts Work?

Let’s imagine a conventional online transaction that does not use smart contracts. 

If someone wants to purchase a car online, they would need a website that displays the applicable information on the desired car, a way of communicating with the seller, a payment system to facilitate payment for the car, and a way to register the car’s ownership with the relevant authorities. 

Each of the aforementioned processes requires an adequate amount of trust between the buyer, the website, and the company rendering the service. If not properly dealt with, any of these processes can significantly alter the entire transaction.

The role of smart contracts, on the other hand, is to ensure a secure, unbiased process; since they use cryptography to prevent alteration of records, they are completely trustless, and work automatically without the need for human intervention. 

Smart contracts are also accurate, as they are written in code, thereby removing the risks associated with miscommunication in written and spoken languages. Lastly, smart contracts do not necessitate third parties or intermediaries for verification, significantly lowering risk of manipulations by third parties by removing opportunity.

Understanding How to Write Smart Contracts

Generally speaking, protocols and individuals largely use ‘Solidity’ for the purposes of writing smart contracts for blockchains such as Ethereum, which hosts a large share of the dApps in the Web 3.0 ecosystem. 

However, individuals who do not know how to write smart contracts with Solidity can build dApps on Ethereum, and can leverage a wide range of free tools to find smart contract templates, and deploy them using Remix. 

With the fast-paced innovation ongoing within the Web 3.0 space, new means of writing and creating Web 3.0 contracts are constantly emerging. Powerful development platforms like Morales serve to simplify these smart contract writing process, as it focuses on JavaScript for blockchain development, while also using shortcuts to attain the smart contract-driven features needed for dApps to run smoothly.

Understanding the Smart Contract Framework

A smart contract is a program that encodes business logic and operates on a dedicated virtual machine embedded in the blockchain. 

A smart contract is usually created in the following manner:

  • Business teams brainstorm and work with developers to outline criteria for how a smart contract should behave in response to certain events, such as payment authorization and shipment receipts;
  • Other complex operations will be carried out, such as ascertaining the value of a derivative financial instrument;
  • An internal expert or audit team that specializes in vetting smart contract security is employed;
  • After vetting, the smart contract is established on an existing blockchain, once authorized;
  • The smart contract is configured to listen to further event updates from an oracle (blockchain oracles are entities that connect blockchains to the external system, thereby enabling smart contracts to execute operations based upon inputs and outputs from the real world);
  • The smart contract is executed once the necessary combination of events meets the conditions outlined by the oracle.

Real-Life Application of Smart Contracts

Several industries have applied smart contracts with outstanding success, let’s take a look at some of their implementations.

Smart Contracts in Finance

Decentralized finance (DeFi) dApps represent a powerful alternative to traditional finance services⁠—the subsequent growth of the nascent sector has been quite noticeable due to the trustless, immutable, and transparent characteristics of blockchain and smart contract technology. 

Smart contracts are particularly useful in the case of insurance claims, automatically handling error checks, routing, and the transfer of payments to users if the appropriate conditions are met. Smart contracts also help by integrating useful tools for bookkeeping, as they eliminate the possibility of the infiltration of accounting records. 

The popularity of DeFi projects has grown both in terms of monetary value and popularity, with many being drawn to the new generation of financial services due to its accessibility without a centralized authority or associated fees. For this reason, the effect of smart contract-based dApps on the financial industry cannot be overstated.

Smart Contract in the Legal Industry

The potential of smart contracts to function as legally binding contracts has proven to be one of the most promising use cases for smart contracts in the real world.

With the advent of e-signatures for binding legal agreements, smart contracts represent a sizeable upgrade for the industry. The availability of the innovation to be equally adopted by several parties for legal agreements, may also serve to inadvertently lower the costs incurred from hiring lawyers and other intermediaries.

Smart Contract in Real Estate

Using smart contracts in real estate can help to reduce, or even eliminate the hidden costs associated with closing fees, title transfers, and brokerage fees when trying to acquire a home or other retail properties. 

Through tokenization, a property’s record-keeping can take place via smart contracts, saving time and money for all parties involved. Indeed, the use of smart contracts in real estate reduces the necessity for legal counsel and other advisory services, which in turn serves cut costs across the board.

Smart Contracts in Other Industries

The list of applications for smart contracts around the world has yet to be fully explored, and several industries are looking to leverage the benefits only they can offer. 

One major industry that has begun to integrate blockchain and smart contract technology is that of healthcare, due to the secure, trustless, and transparent data sharing processes within the smart contract system. 

With the myriad of use cases for smart contracts spanning across several industries, smart contracts are poised to continue revolutionizing the world of digital agreements.

The Importance of Smart Contracts in Web 3.0

One of the major benefits of using smart contracts is that they do not require brokers or intermediaries to confirm an agreement—this has proven to be essential for the newest iteration of the web.  User autonomy means being free from power hoarders, which helps foster the decentralized world envisioned by the very pioneers pushing for Web 3.0 initiatives. 

Smart contracts provide a new way to transact online without the middleman, simply because they are accurate, interruption-free, and cost-effective.

The importance of smart contracts in actualizing the world of Web 3.0 is their involvement with businesses and entrepreneurs. Smart contracts handle user authentication without the need for a centralized sign-up process controlled by a single entity or company. This setup allows anyone to sign up with multiple decentralized apps (dApps) using a single-user wallet that no one except the owner can control. 

Smart contracts can also be used to create decentralized autonomous organizations (DAOs) which can be used to organize governance among a great many users, all without engaging with a corporate entity.

The use of smart contracts will surely be pivotal in ushering in a Web 3.0 economy devoid of centralized authorities, and providing distributed opportunities to users all over the world. 

Final Thought

To build the next generation of websites, dApps, or online businesses in Web 3.0, and smart contracts, coupled with their immense capabilities, are of immense importance to be able to achieve an entirely decentralized economy.

Read more about smart contract implementation:

New Cardano (ADA) Ledger App Update Introduces Smart Contracts Functionality

For more on Web 3.0 decentralization, check out:

Solana: The Road to Decentralization

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Tunbosun Oyinloye

Bosun is a crypto writer and public relations specialist with nearly a decade of experience. He delved into the crypto world in 2016, the same year he purchased his first crypto asset. He has since made it his mission to continually hone his crypto knowledge and writing skills. In recent years, he has collaborated with a number of reputable crypto brands and firms such as: Coin Rivet, Market Across, Esteem Finance, and Koettum. At DailyCoin, Bosun covers educational content and listicles. When he isn’t working, you will likely find him streaming a law or crime series on Netflix.