Getting Smart About Contracts - How Blockchain is Changing The Way Small Businesses Work

April 20, 2022

Business is based on contracts. As such, if you're a small business owner, consultant, or freelancer, you likely spend a lot of time crafting and following agreements. This process also involves worrying about whether the other party will live up to their side of the bargain and thinking about what you can do if they don't.

Now, the same technology that drives cryptocurrency can be used for a more dynamic form of agreement -- one that can significantly streamline things for small businesses and freelancers. Traditional paper contracts (even those in digital form) require effort and trust. Blockchain technology can take some of that friction out of the process.

Traditional paper contracts (even those in digital form) require effort and trust. Blockchain technology can take some of that friction out of the process [with smart contracts].

These smart contracts can make it easy to streamline crucial aspects of deal-making. You can scope out what work will be done, when it will be done, and how the money will be handled. You can also automate the execution of certain aspects of the agreement.

Here, we'll explain the basics about these smart contracts. You'll see how they work and get info to help you decide whether you should consider one for your next project.

What is a smart contract?

You've heard of cryptocurrencies and NFTs. Well, a smart contract works on the same underlying principle, leveraging blockchain technology to automate some of the interactions among parties to a deal.

Don't think of these as just digital versions of an agreement. They have more functionality than a Word document or a PDF. Rather, consider these more as computer programs, with the code automating the execution of terms of the agreement.

How does a smart contract work?

The main benefit of smart contracts comes from their self-executing nature. They act as computer programs -- when certain conditions are met, the blockchain-based system will automatically produce a desired result.

For instance, your company is waiting for a delivery of products. Once you get the materials in your warehouse, you'll make payment. With a smart contract, once you log the shipment's arrival into your system, the funds will be automatically released.

As with other blockchain applications, smart contracts can also act as useful stores of information. As a result, they are often used in situations where data needs to get held for future use. This can include industries like real estate and health care.

The pros and cons of smart contracts

Before you decide whether to pursue smart contracts as a business strategy, you should understand the value they provide and the challenges they pose. With that in mind, here are a few benefits and drawbacks to these alternatives:


  • Controls risk: Running a business or organizing a freelancing schedule requires a delicate balancing act. Events have ripple effects that vibrate throughout the operation. Smart contracts make sure that small mistakes -- like forgetting to send an invoice -- won't create problems.

  • Facilitates deals with first-time partners: Any business transaction involves trust. Sometimes, this is difficult when you don't know the other party well. Smart contracts lower the amount of faith you need in first-time partners, because the structure of the technology automates certain aspects of the relationship.

  • Lowers administration cost: Since smart contracts utilize automation, some actions take place without your direct oversight. This can save you time and effort.

  • Limits confusion: The language of contracts can get confusing. As a result, it can lead to misinterpretations when it comes time to enact the terms. The structure of a smart contract can sidestep these issues, as the technology breaks the process down to "if/then" statements.


  • Gray legal area: Smart contracts are a new development. As such, they lack the same well-developed legal structure that governs more traditional business dealings.

  • Hard to change: Once a smart contract is created, it is difficult to update. Any future tweaks to the deal will likely require throwing out the original version and starting from scratch. This can complicate the process when you are operating in a fluid situation.

  • Lack of Flexibility: Sometimes, it is in your best interest to take advantage of some of the human flex built into traditional agreements. If a contract says you have 30 days to remit payment, you might sometimes take 35 days to send a check. Usually, a technical breach like this comes with limited consequences and can be important in times of stress. However, a smart contract doesn't leave much range of action. The terms are hardwired into the program, leaving little wiggle room if unusual situations arise.

How to use smart contracts

If you're ready to consider using smart contracts, you'll need a process for creating them. As a cutting-edge technology, these programs require some expertise. Your basic decision comes down to whether you want to produce them in-house or use outside developers.

A lot will depend on your company and your personal background. You might have the skills yourself to dip into the smart contract world. Or your business might deal heavily in tech, meaning you could have plenty of expertise on staff. In these cases, you can leverage that built-in head start for an efficient entry into this arena.

However, don't feel bad if the routine logistics of smart contracts remain over your head. Most small businesses won't have the competencies in house to create these, without making a further investment.

In those cases, you may need to turn to an outside developer. Start with finding someone who can serve as a consultant, helping you develop your smart contract strategy. From there, you can decide whether you want to hire third-party programmers on a contract basis or consider full-time staffers.

In those cases [where you don't have an in-house tech team], you may need to turn to an outside developer. Start with finding someone who can serve as a consultant, helping you develop your smart contract strategy.

Meanwhile, choosing to create your own smart contracts means selecting the platform that works best for you. Ethereum offers the biggest-name blockchain that can serve as a basis. However, with the growing crypto space, you can also turn to some of Ethereum's burgeoning competitors. This includes names like Solana and Polkadot.

The next evolution of contracts

As blockchain becomes a more acceptable part of mainstream conversations, smart contracts will become a more prevalent way to conduct business. However, you don't want to get swept up in a technology you don’t understand. There are pros and cons to using smart contracts, and there are certain industries where using this technology makes more sense than others.

The key is understanding the benefits and drawbacks of these options. The information provided here should point you in the right direction, giving you the background you need to learn more about smart contracts. From there, you can decide if you should start using smart contracts with your next small business, consulting, or freelancing client.