Types of Smart Contracts

As the foundation types of smart contracts become more useful, their adoption by a wide range of industries keeps multiplying.

What you will learn

  • The three main types of smart contracts
  • Examples of their real-world use
  • Future adaptations

What you will learn

  • The three main types of smart contracts
  • Examples of their real-world use
  • Future adaptations

From real estate to health insurance to neighborly exchanges, the use of smart contracts continues to blossom. There still are three basic types of smart contracts that are the source of this growth. Why are smart contracts seeing such success? What are their limitations? And how do we actually use them?

Valuates Reports, a market research firm, predicts that over the next six years, smart contracts’ global market value will increase nearly five times from its 2021 value. Growing from $315.1 million to the projected $1.46 billion, Valuates anticipates a Compound Annual Growth Rate of 24.2% from 2022-2028 (*1).

As public knowledge and trust in smart contracts increases, the horizons of how to use them expand. Smart contracts can save both time and money, creating agreements between two parties without the need for a trusted third party, such as a lawyer, bank, or real estate broker.

Another contributor to their success is their reliability. These digital contracts are placed in blockchain networks, which means they are incorporated into a distributed ledger and cannot be edited once agreed upon. This immutability boosts the security, transparency, and accuracy of such contracts.

At present, one of the main limitations to how smart contracts work is the lack of standardization between blockchain platforms. Smart contracts are limited to their single blockchain platform and can’t cross-communicate to another blockchain server. But the use of smart contracts grows nonetheless. We roughly classify smart contracts into three main categories. In this article we’ll define each category and explore real-world examples.

Smart legal contracts

Like traditional legal contracts, smart legal contracts follow the semantics of “If this happens, then this will result.” Not all smart contracts are legally enforceable contracts, but smart legal contracts can carry out contractual obligations and execute automatically when the conditions and terms have been met.

To create some smart legal contracts, the parties involved work on the smart contract code — or their software developers do — until they settle on the terms and conditions of the agreement. Other blockchain contracts, like those on betting sites, are set up by third parties. In either case, the parties entering into an agreement don't need to ever meet in person or even know the other’s identity. They can each provide a digital signature and the legal status of the contract is officialized.

Real-world example

With the advent of smart contracts, the realm of contract law is shifting into digital form. Home Depot uses smart legal contracts with vendors. Home Depot’s director of financial operations, Brian Quartel, explains in an IBM case study that they are essentially creating visibility between themselves and their vendors into what has been shipped and received.

“It’s almost like a settlement is happening with every single transaction versus waiting six, nine, 12 months down the road,” Quartel says.

The current legal framework for smart contracts varies in the judicial systems of various regions and nations. Legal experts and associations are working to define a legally enforceable smart contract, and the processes are evolving as they become more commonplace. In California, for example, you can already be wed by a smart contract marriage license.

Further adoption

Smart legal contracts are finding niches in industries like manufacturing and cryptocurrency, but they also have the potential to expand into other fields, such as health care, settling HIPAA violations or disputes, and real estate.

Rife with mountains of paperwork and incremental proceedings, real estate is full of potential for smart legal contracts. In fact, the Republic of Georgia has been creating a land title registry using a block-chain since 2016, and other nations are following suit.

Decentralized autonomous organizations

Smart contracts also have the potential to revolutionize corporate structure. The advent of decentralized autonomous organizations means that businesses can be built collaboratively between shareholders without CEOs or bosses. They can be autonomous and self-sustained using smart contract code agreed upon by all participants who founded the DAO, and the code and business structure can evolve using whatever voting system the DAO establishes.

Being trustless, the code will persist with or without management. Change in leadership doesn’t influence the DAO’s purpose, vision, or function. And like all smart contracts, DAOs are open source. They’re visible to all members and non-members of the DAO; bugs can be fixed, and suggestions can be pitched to the DAO by anyone.

On the other hand, its open-source nature creates the potential for cyberattacks against DAOs. With code openly accessible, someone can reverse engineer and attempt to attack a DAO. Additionally, as a DAO pursues research and development in whatever field, its corporate information is also open source. There are no business or trade secrets in DAOs.

Real-world example

In February 2022, a three-way collaboration was formed between Molecule, a decentralized technology firm, Apollo Health Ventures, a venture capital fund focused on longevity research, and VitaDAO, a DAO focused on funding longevity research.

VitaDAO creates funding opportunities for biotech scientists without grant applications or patent-registering. Every project that VitaDAO takes on is given an IP-NFT, or an Intellectual Property Non-Fungible Token. In so doing, the members of the DAO manage proposed research submissions and their progress, allocate funds to chosen researchers, and even find patients for the research.

Beyond removing corporate hierarchy from business structures, a fully self-propelled DAO will handle transactions like peer-reviewing team members and awarding tokens for accomplished tasks.

Further adoption

DAOs are part of the decentralized finance world, and the greatest barrier to them is physical. Organizations that want to handle or distribute physical products have to have humans involved—that is, until robotized technology becomes more accessible. Also, governance at any scale is, and remains, complex. As organizations become more nuanced, inventive uses of DAO-component technology and multi-function smart contracts will streamline new management structures.

Application logic contracts

Products around us are getting smarter. From our phones to our air purifiers and cars, technology is coordinating and communicating across a growing Internet of Things (IoT) to make our user experience smoother. Application logic contracts are smart contracts catered specifically to this communication between different devices.

Real-world example

A smart toothbrush has been released by Beam Technologies, a startup based in Columbus, Ohio. The toothbrush is coordinated with their recently launched dental insurance company, using sensors in the toothbrush to collect data on the user’s dental hygiene. The toothbrush "talks" with Beam Dental and affects the user’s dental premium rates: the longer you use your toothbrush, and the more times you use it each day, the lower your premium becomes.

Key for ALCs across the Internet of Things is the automated execution of data transfer, triggering different responses. Using application-based code and blockchain as the backbone for secure data transfer and storage, developers can find countless inventive roles that ALCs can play.

Further adoption

ALCs streamline information exchange within industries and have the potential to protect both producers and consumers. As of now, ALCs mostly work under individual managing programs that can communicate only by using the same blockchain server, limiting the devices that can be connected.

Regardless, different sectors have huge room for development using this traceable data. One powerful example? Agriculture.

From seed to fruit, IoT can monitor incoming data on weather, soil quality, and pest presence for a certain field of crops. In the case of contamination and food recalls, or in the case of extreme weather that will impact crops, ALCs can trigger communication through the supply chain of farmers, transporters, distributors, and consumers. If a drought hits, ALCs can help the market manage the weather's impact.

The farmer also could be protected by the IoT. A smart legal contract could activate farmers' insurance payouts if it’s recorded that they did everything in their power for a crop to succeed (like storing seeds at the right temperature and following their regimented watering and fertilizing schedule) and then unpredictable weather ruins their crop yield.


As smart contracts grow more versatile and are applied more often, they permeate into our lives. From dental hygiene to global trade or even proposing marriage, this digital form for legal agreements is being used in new ways every day. Combined with blockchain technology’s rising popularity, more applications for smart contracts augur a promising increase in market value.

Hedera offers computer programs to help create blockchain contracts using their EVM-Compatible smart contract platform, Smart Contracts 2.0. Now live on the Hedera Mainnet, Smart Contracts 2.0 uses Solidity, a highly accessible programming language, while also providing predictable and inexpensive gas fees, scalable and speedy transactions, and carbon negative performance.

Smart Contracts Market size worth over USD 1460.3 Million by 2028, at a CAGR of 24.2% | Valuates Reports