How Do Smart Contracts Settle Value?

Smart contracts settle value through "if/then" conditional logic coded in languages like Solidity—when network nodes verify predetermined conditions are met, the blockchain automatically executes the settlement and updates permanently, accessible only to contract parties. The process operates like a vending machine: payment triggers automatic product delivery without intermediaries, scaled to complex transactions including DeFi lending (Compound), stablecoins (USDC 1:1 USD peg), and decentralized exchanges (Raydium), with execution requiring "gas" fees on Ethereum. Settlement depends entirely on code accuracy—the 2016 DAO hack exploited a recursive call bug to settle 3.6 million Ether (~$170M) to an attacker who technically followed the contract's coded rules.

Smart contracts are digital contracts stored on a blockchain that are automatically executed when predetermined terms and conditions are met. Participants of agreements or contracts can be immediately certain of the outcome, without any intermediary involvement or time loss. Just like a traditional contract, a smart contract allows two or more parties to code the conditions of their agreement. Smart contracts will administer these without fear or favour, which is why smart contracts are one of the most revolutionary developments running off blockchain technology.

What are smart contracts on blockchain?

Smart contracts are digital contracts stored on a blockchain that are automatically executed when predetermined terms and conditions are met. Participants of agreements or contracts can be immediately certain of the outcome, without any intermediary involvement or time loss.

Just like a traditional contract, a smart contract allows two or more parties to code the conditions of their agreement. Smart contracts will administer these without fear or favour, which is why smart contracts are one of the most revolutionary developments running off blockchain technology.

What are the pros and cons of smart contracts?

Pros of smart contracts:

·         Accuracy: Terms are outlined in explicit details.

·         Transparency and Trustworthiness: Terms are accessible to all contractors.

·         Communication: Misinterpretation or miscommunication is unlikely.

·         Speed and Efficiency: No manual processing of documents.

·         Security: Smart contracts operate at a high level of data encryption.

·         Green: Smart contracts are paper free.

·         Backup and Storage: Transaction records are time-stamped and permanently stored. They are also easily recovered.

·         Cost savings: No need for intermediaries.

Cons of smart contracts:

·         The code is difficult to be changed: Code changing is practically and potentially expensive.

·         Loopholes: A loophole may happen when ensuring smart contracts terms 100 reflect what parties agreed.

·         Requiring third-party involvement: Developers may need someone who understands contract law to help explain to create specific codes.

·         Vague terms: Smart contracts cannot handle vague terms or conditions.

·         Lack of regulation: The blockchain industry is unregulated and is unregconised by traditional legal fields.

How do smart contracts settle values?

Despite the name, smart contracts aren’t “smart”. They don’t think on their own, even though they can make real-time decisions. Their autonomy comes from the pre-coded rules and conditions in their functions.

In essence, smart contracts work by the simple “If/When …. then …” statements written into code on a blockchain. A network of computers executes the actions when predetermined conditions have been met and verified. Imagine a vending machine that sells cans of soda for a quarter. If you put a dollar into the machine and select a soda, the machine is hardwired to either produce your drink and 75 cents in change, or (if sold out) to prompt you to make another selection or get your dollar back. This is an example of a simple smart contract. Just like a soda machine can automate a sale without a human intermediary, smart contracts can automate virtually any kind of exchange.

A simple smart contract may function as a vending machine. Source: Frontu

Obviously, smart contracts are deployed for much more complicated actions including releasing funds to appropriate parties, registering a vehicle, sending notifications, or issuing a ticket. Whenever a transaction is completed, the blockchain is updated and cannot be changed. The results are only accessible to all parties of the contract. 

In addition, smart contracts aren't legally enforceable. There is no legal framework existing that offers recourse in case of failure or error. In fact, some contracts depend entirely on the coding and development skills of the team behind them. If an error is made that creates security gaps or bugs, huge losses can be incurred.

For example, one of the largest crypto hacks of all time was the DAO attack on the Ethereum blockchain in 2016. In the attack, a hacker took advantage of what is called a recursive call bug and stole over 3.6 million Ether.

At the time, that was worth over $170 million AUD. Because the hacker technically played by the rules of the DAO’s smart contracts, he claimed that he didn’t steal the Ether.

It is important to note that the DAO hack wasn’t due to a failure of the Ethereum blockchain, it was simply a bug in the DAO built on top of the ecosystem.

Since smart contracts are self-executing and self-arbitrating, they must cover every scenario and condition. What makes them secure is the fact that a public blockchain database maintains mutual trust. Everyone can see what transactions are taking place and must vote on them.

Smart contracts are already revolutionising business, online communities, finance, and so much more. While the technology is still improving, its potential is inconceivably large, especially as the IoT and Web3 come into mainstream use.

Deployments of Smart Contracts

Source: altabel.com

Currently, Ethereum is the foremost smart contract platform, although numerous other blockchain networks, such as EOS, Neo, Tezos, Tron, Polkadot, and Algorand, can also execute smart contracts. Anyone can create and deploy a smart contract on a blockchain, and the code governing these contracts is transparent and publicly accessible. This transparency enables interested parties to scrutinise the logic that a smart contract follows when handling digital assets.

Smart contracts are authored in various programming languages, including Solidity, Web Assembly, and Michelson. On the Ethereum network, the code of each smart contract is stored on the blockchain, permitting interested parties to examine the contract's code and status for validation of its functionality. Every node or computer on the network retains a copy of all existing smart contracts, along with their status, in conjunction with blockchain and transaction data.

Upon receiving funds from a user, a smart contract's code undergoes execution by all nodes in the network, leading to a consensus on the outcome and the subsequent flow of value. This decentralized process ensures the secure execution of smart contracts without reliance on a central authority, even when users engage in intricate financial transactions with unfamiliar entities.

Executing a smart contract on the Ethereum network typically incurs a fee known as "gas," essential for maintaining the blockchain's functionality. Once deployed on a blockchain, smart contracts are typically immutable, meaning they cannot be altered, even by their creators, with some exceptions. This immutability safeguards smart contracts from censorship or shutdown.

Smart Contracts Revolutionised Blockchain and Crypto

Smart contracts aren’t merely transactional. Today, blockchain developers can build complex applications called decentralized  Applications or DApps using smart contracts.

Illustration of decentralized  Applications. Source: Bitstamp

DApps are decentralized  due to the design of blockchain ecosystems such as Ethereum. No central authority is necessary to execute and mediate agreements between parties. No single user controls the DApp, and all the rules are contained in the terms coded in the smart contract.

decentralized  finance (DeFi) is one of the most well-known examples of DApps. For example, decentralized  exchanges allow for complex transactions like lending, savings, or insurance without any central oversight. No institution or intermediary is required to facilitate transactions on these platforms. DeFi also ensures universal access to financial cryptocurrency services.

Examples of advanced DApps include:

• Compound is a platform that allows peer-to-peer lending and borrowing. Lenders earn interest on their crypto, and borrowers access funds easily and quickly.
• USDC is a stablecoin that keeps the value of one coin at the value of one dollar. It is a type of digital currency backed by the value of a fiat currency.
• CryptoMines is a SciFi game launched on the new Binance Smart Chain (BSC). CryptoMines allows players to explore the Metaverse and earn crypto tokens called ETERNAL.
• Raydium is a decentralized  cryptocurrency exchange (DEX) running on Solana.

Conclusion

Smart contracts settle value by executing code exactly as written—no negotiation, no interpretation, no intermediaries. When conditions are met, nodes verify, consensus is reached, and settlement happens automatically. This eliminates human discretion, which is both the technology's greatest strength and its most dangerous vulnerability.

The upside is clear: DeFi platforms process billions in lending, stablecoins maintain dollar pegs algorithmically, and decentralized exchanges operate 24/7 without central control. Transactions execute faster, cheaper, and more transparently than traditional systems.

The downside is equally clear: code bugs aren't negotiable. The DAO hack settled $170 million to an attacker who technically followed the contract's rules. Once deployed, smart contracts are immutable. There's no customer service, no legal appeal, no "undo" button.

As Ethereum, Solana, and other platforms mature, smart contract infrastructure is becoming the backbone of decentralized finance. But settlement certainty depends entirely on code quality. One logic error, one unhandled edge case, one recursive call vulnerability—and millions can drain in minutes.

Smart contracts don't settle disputes. They settle code. Make sure the code says what you think it says.