Why Smart Contracts Aren’t as Smart as You Would Think.
It’s Sunday night—not just any Sunday night, but Super Bowl night. You and your friends are gathered for a “fun” (read: competitive) evening of NFL action. One of your buddies, a die-hard Chiefs fan, smirks and says, “Let’s make this interesting. I bet the Chiefs get their three-peat tonight.”
You, the proud Eagles fan that you are, refuse to back down. “You’re on. A hundred bucks says the Eagles will crush your beloved Chiefs tonight.”
“Deal.” The bet is set.
Fast forward a couple of hours—it’s clear Mahomes is having an off night, and the Eagles dominate. Victory is sweet. You turn to your friend: “Pay up.”
His response? A blank stare. “For what?”
“The bet. You lost.”
“I don’t bet. You must be mistaken.”
Typical. You sigh, frustration creeping in. Betting with this guy always ends up in the same nonsense. If only there were a way to stop this kind of thing from happening...
Wait—there is. Enter smart contracts—a brilliant little invention designed exactly to prevent situations like this.
Today, I’m going to walk you through the fundamentals of smart contracts. No, you won’t be writing one by the end of this article (at least, not just because of this), but you will understand the basics. And surprise: smart contracts aren’t as complicated as they sound. In fact, they’re not even that smart...
So grab a coffee, and let’s dive into the world of smart contracts!
Contracts - But Smart
Before we go full-throttle into smart contracts, let’s start with the basics. What exactly is a smart contract? Once we define it, we can peel back the layers and see what makes it tick.
A smart contract is a (1) self-executing computer program stored on a (2) blockchain that automatically enforces and executes the terms of an (3) agreement when (4) predefined conditions are met.
Now, let’s dissect each part.
Self-Executing
First off, smart contracts are self-executing. That means they run on their own—no need for a bank, lawyer, or third-party to get involved. At their core, smart contracts are just simple computer programs that follow a basic “if this, then that” logic. If Condition A is met, then Action B happens.
Sounds smart? Not really. Smart contracts aren’t intelligent—they don’t think, they just follow code. They’re as smart as a vending machine: insert money, make a selection, and out pops your snack. No decision-making, just execution.
Blockchain
Smart contracts don’t just float around in cyberspace—they live on a blockchain. When they execute a transaction, it gets added to the blockchain, just like any other crypto transaction.
This means every interaction with a smart contract is public, tamper-proof, and recorded forever. Want to cheat the system? Too bad. Every transaction is verifiable, and once it’s on the blockchain, there’s no undo button.
Of course, using blockchain comes with fees—every transaction requires a small payment (gas fees) to keep the network running. But we’ll dive into blockchain benefits later. For now, just remember: smart contracts don’t work without blockchain.
For an in-depth explanation on blockchains, check out this article.
Agreement
Like traditional contracts, smart contracts exist to formalize an agreement between two or more parties. The key phrase here is "multiple parties"—if only one person is involved, why put it on a blockchain?
The power of smart contracts comes from their public nature. It’s a trustless way to make deals—once the contract is set, nobody can back out or manipulate the terms. There’s no “oops, I forgot” or “that’s not what I meant” nonsense. If the conditions are met, the contract executes. No wiggle room.
Predefined Conditions
A smart contract only works if it has clear, predefined conditions. These are written directly into the code and have two major advantages:
Total transparency – The code is public. Everyone involved can read it, so nobody can claim they "didn't know" the terms.
No interpretation needed – Unlike traditional contracts, where lawyers argue over the wording, a smart contract does exactly what it’s coded to do. Same input, same output, every single time.
In short: no surprises, no loopholes, no arguments.
A Revolutionary Concept…
Smart contracts aren’t a brand-new concept. In fact, back in 1994, cryptographer Nick Szabo—often speculated to be Satoshi Nakamoto, the mysterious creator of Bitcoin—coined the term and outlined how these self-executing contracts could work. What makes them revolutionary is the same thing that made blockchain revolutionary: they eliminate the need for trust in third-party intermediaries. Instead of relying on a middleman to execute a contract when certain conditions are met, the contract itself knows exactly what to do and when to do it. Transactions are processed securely and automatically, reducing (or even eliminating) the risk of fraud. Once executed, there’s no undoing it—the blockchain’s immutable nature ensures that every transaction is permanently recorded.
This immutability brings immediate advantages. Speed and efficiency are among the most significant. With traditional contracts, execution depends on a third party to approve and process transactions, which often leads to delays. Smart contracts, however, trigger execution instantly once conditions are met, making transactions real-time and frictionless. This efficiency also translates into lower transaction costs—no need to pay hefty fees to lawyers, banks, or other intermediaries. Instead, a small blockchain transaction fee is all that’s required.
Another major advantage? Reusability. Unlike traditional contracts, which are often custom-drafted for each agreement, smart contracts can be standardized and reused across multiple transactions and parties. This streamlines processes, reduces redundancy, and further cuts costs.
Then there’s transparency. Smart contract code is publicly available, meaning anyone can verify how a contract works before engaging with it. Developers can even build on existing contracts to create more specialized agreements, fostering an open-source financial ecosystem. Again, this brings us back to the key theme: lower costs, higher efficiency.
Now, I know what you’re thinking—this all sounds very theoretical. Let’s break it down with real-world applications where smart contracts have already made an impact.
DAO
A Decentralized Autonomous Organization (DAO) is exactly what it sounds like—a fully autonomous organization powered by smart contracts. Think of it as a business that runs itself, following pre-programmed rules without the need for human oversight. DAOs operate completely on "if X, then Y" logic. But instead of needing human intervention, these processes execute automatically.
In some cases, physical actions (like loading a truck) still require human involvement. But for non-physical decisions—such as strategy formulation or fund allocation—DAOs use smart contracts to fully automate governance. Every transaction and decision is publicly recorded on the blockchain, ensuring full transparency.
Here’s where it gets interesting: Instead of traditional shares, DAOs use tokens. Investors can buy into a DAO by purchasing its tokens, which serve as both ownership stakes and voting power. The more tokens you own, the more influence you have on decisions. But here’s the catch—no single entity should be able to hold more than 50% of the tokens. Otherwise, it wouldn’t be “decentralized” anymore. This rule safeguards the integrity of the system. There are principles and frameworks that discuss the design of a DAO - also dealing with “DAO Governance” - but discussing these here would take us too far.
A particularly compelling use case? Investment DAOs. Investors pool funds into a DAO, receiving tokens in return. These tokens act as votes on proposals submitted by members. When a proposal meets a predefined threshold (e.g., 50% approval), the smart contract automatically executes the transaction. No middlemen, no bureaucracy—just seamless, transparent decision-making.
Insurance
Another fascinating use case is insurance. Companies like Etherisc are already leveraging smart contracts to create automated insurance policies. Their Generic Insurance Framework (GIF) enables instant, reliable payouts based on real-world events.
Take flight delay insurance as an example. Traditional insurance claims involve lengthy paperwork, manual verification, and frustrating wait times. But with smart contracts, the process is instant. If a flight is delayed by X hours, the system receives this data in real time, triggers the contract, and automatically pays out compensation—no disputes, no delays, no hassle.
…Or Not?
While smart contracts offer numerous advantages, they also come with challenges. Since they exist purely on the blockchain and not in the physical world, they need a way to interact with real-world data. This is where oracles come in.
No, we’re not talking about predicting the future—an oracle in blockchain terms is a data provider that feeds smart contracts with real-world information. For a smart contract to execute correctly, it must verify whether the contract’s conditions have been met. This means two things: (1) the required data must exist, and (2) that data must be accurate. Without an oracle supplying reliable information, the smart contract becomes useless.
Take a simple example: imagine you want to automate your coffee stock management. You could create a smart contract that automatically orders new coffee when your supply drops below a certain level. However, for this to work, you need a system to track your coffee stock—a database or sensor connected to the contract. Without this real-time data input, the contract cannot function. Fortunately, advancements in IoT and AI are rapidly bridging this gap, making data collection more efficient and reliable.
However, even when data is available, its accuracy is crucial. A smart contract executes automatically based on the information it receives. If that data is incorrect, the contract will still proceed, potentially leading to irreversible transactions. Unlike traditional agreements, there’s no undo button.
One of the core strengths of smart contracts is their transparency. Because they are public and immutable, users can trust the system’s fairness. However, transparency isn’t always ideal—especially for organizations that handle sensitive information or proprietary processes. Moving to a fully transparent Decentralized Autonomous Organization (DAO) might not be a viable option for companies requiring confidentiality, as everything in a DAO is exposed.
Additionally, transparent code means transparent vulnerabilities. If a smart contract contains a bug or loophole, hackers can study the code and exploit it. A prime example of this was The DAO hack of 2016. At the time, The DAO managed approximately $150 million in funds. Due to a flaw in its smart contract, hackers were able to drain around $50 million into their own wallets by simply triggering the contract’s logic. This event led to one of the most controversial decisions in Ethereum’s history—a hard fork that split the blockchain into Ethereum (ETH) and Ethereum Classic (ETC).
Since then, security in smart contracts has significantly improved. DAOs and decentralized applications undergo rigorous security audits and testing before deployment. Still, the risk remains, and developers must be meticulous when writing and reviewing code.
Another challenge of smart contracts is their lack of flexibility. Unlike traditional legal agreements, which allow for interpretation and context, smart contracts execute only based on predefined conditions. This can be a limitation in fields where rules are subject to human judgment.
Take taxation laws in Belgium, for example. The country has general guidelines on whether capital gains are taxable, but the rules are somewhat vague. The principle (loosely translated) states that "capital must be managed as a prudent administrator"—but what does that mean in practice?
For one person, being a "prudent administrator" might mean investing cautiously in government bonds. For another, it might mean going all-in on the latest Hawk Tuah Coin. The reality is somewhere in between, but the exact threshold is unclear and often depends on interpretation and circumstances. Since smart contracts rely on strict, predefined rules, they struggle to accommodate such nuanced legal or financial scenarios.
This rigidity limits their application in areas requiring discretion, judgment, or adaptation to unique cases. While automation is powerful, some aspects of the legal and financial world will likely continue to require human decision-making alongside smart contract execution.
Final Thoughts
Smart contracts are an incredible innovation, automating trust and eliminating intermediaries in ways that were once unimaginable. But as we’ve seen, they’re not without their challenges. From the need for reliable data sources to security risks and the inability to handle nuanced legal interpretation, smart contracts still have hurdles to overcome before they can truly replace traditional agreements in every field.
That said, the future is bright. With ongoing advancements in oracles and blockchain security, the world of smart contracts is evolving rapidly. We’re seeing more sophisticated solutions that address these limitations, making decentralized technology more accessible and reliable. The key takeaway? Smart contracts aren’t perfect, but they’re here to stay—and they’ll only get better.
And speaking of evolution, we’re not done yet! This Wednesday, we’ll be back with our selection of a firm from last article’s winning industry: Environmental & Waste Services. Stay tuned as we dive into the world of sustainability, efficiency, and the companies shaping the future of waste management.
Until then, keep questioning, keep learning, and, of course: don’t bet on a handshake deal.
📢 What do you think? Are smart contracts the future of automation, or do their challenges limit their real-world impact? Drop your thoughts in the comments! Let’s discuss. 👇
🔔 Don’t miss out! This Wednesday, we’ll reveal the one company we believe has the best potential in this sector.
