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What is smart contract and why is it needed for an ICO?

Posted Feb 22, 2018

Money is a delicate transactional utility. Think of it as a solution and a problem, like a coin having two sides, most business relationships have been terminated due to disgruntled business partners. The human factor in business relationships has always been its own undoing.

So much potential when it comes to innovative ideas and concepts that can address relative social and economic needs and solve many plaguing challenges in the society today and all is depended on an unpredictable variable – humans. As a result, it’s a given that not all conflict cannot simply be solved with a coin toss – not when huge millions of dollars can be at stake.

Trust – a really BIG issue

I always like to picture it this way, imagine you need a product from a vending machine, say a cola; all you need do is go to the machine and input the necessary conditions that generate the required results – a coin for the transaction, a choice from the preordered list – and suddenly the bonnet pops and your drink is served.

Comparatively, if you had to go to a bar and have an attendant serve you a drink, you would be worried they don’t mess your order up, or at the least get you to wait so long before they finally remember you placed an order.

Another very similar analogy would be the Automated Teller Machine (ATM), since their development, it’s become much easier to cash out from your bank account without regular boring visits to the bank and over the counter queries.

As long as there is service, funds, and power in the machine you can transact accordingly with no stress or hassle. Well, I don’t need to explain what you are missing when you have to walk into the banking hall and experience the human teller.

One thing we can observe from the above scenarios is that whenever a human element is involved in processing certain operations there are bound to be some letdown. This is because humans are limited both in logical capacity and storage ability.

More so, they are prone to emotional variableness and mood swings. While some may argue that man has an impressive amount of unused potential – that’s just it – unused means redundant and not useful.

Automatons of trusts

Smart contracts are simply codes, computer codes generated to efficiently mimic the real-world legal deals with executable command lines that makes them behave autonomously as if independent of human interferences.

However, these codes are being perceived as the automatons of trust in order to ensure that business transactions run as smooth as they were designed to, without deviating one bit from the code-clause that constitute them.

We now understand the reason why many people run to crowdfunding-like activities labeled as initial coin offerings (ICO), whereby it is easy to raise quite the amount required to fund virtually any kind of project with credible potential.

But the downside is that, while it may obviously circumvent the bureaucratic challenges that come with traditional venture capital systems, it heightens the exposures to risks, as people who participate in this type of investments or ‘contribution’ as they are often referred to as are neither guaranteed a success nor are ensured of the money invested into the new business. It’s more like an investment in blind fate. It takes a little more effort for it not to be all just a ‘hype’.

This makes it a little harder than a walk in the park. When I cannot be assured that my investments are safe in the hands of the mysterious project developer, what can I do? So far there has been no specific legal jurisdictions that I can file a complaint should anything go south. But I truly can see the prospect in this venture and how they can use their product to change the economy, it’s also a financial leap for me should the project succeed… torn by a dilemma – smart contract saves the day.

Since the beginning of ICOs, the one standing challenge has been whether or not a particular project has what it takes to see it through to the end of their campaign. It is true that many scams and failed projects have existed, but the ones which have succeeded have done more good than harm.

Smart contracts tend to give blockchain and ICO investors nowadays the courage needed to support a particular project. These computer codes make it easy by acting as an intermediary between the developer and the investors.
Typically, funds are transferred to a specific address where they are stored and can be monitored during the time frame for the project development.

In return, these contracts also issue ‘tokens’ like a certificate like a document or expression of good fate from the developer to the investor in the hopes that, as the project develops and becomes more successful, the tokens can be exchanged back to the currency of donation down the road of the project’s timeline.

One other very important aspect of smart script operation is that they also act as escrow agents, whereby the codes within the system can be adjusted to account for project development phases and release of funds according to development progress.

Smart contracts have become usable in almost all genuine and credible ICOs. Thanks to Ethereum network, the first decentralized platform to implement this aspect of blockchain technology, we can now have a little more faith in our developers and they also can be more committed to delivery on the set promises.

Another very important feature of these programs is the transparency it offers to the decentralized system. One can see how much tokens were emitted and if they correspond to the original value stated in the whitepaper. And the distribution process can also be viewed to see if the transactions were properly disbursed.

Some other projects have taken it a little bit further by using smart contracts in lending services to achieve maximum loan repayment and lease profiting systems.

Before entering into a deal, the codes are verifiable and the terms or conditions on which the deal is contingent can be evaluated to ensure that it has a neutral personality. What this means is that the terms of the deal don’t just favor the developer or the initiator of such agreement, but also all parties to be involved in the business process.

In the end, we can see how conflict can be totally avoided with these computer codes and rules.

Why is it needed for an ICO?


Any ICO project which is ready to launch without these computerized agreements in place, is in for a tough ride, as people now understand how important they are and that it helps reinstate confidence.

Especially when human factors have failed time and again, it’s hard to put one’s trust in a system that is decentralized without regulation and has so far not received much of mainstream adoption. It is important for developers to place their reputation on the line through this contracts in order to ensure they have their investors at heart.


One primary challenge with most startups is the journey after the beginning. Many projects in the crypto world have been able to scale through their crowdsales successfully and some even achieving their hard caps; however, most of them have a hard time keeping up with their objectives.

These contracts can help stabilize the relationships between investors and developers by establishing long-term contingent agreements to reevaluate trust models.


Transparency is vitally important in any business relationship. If any stream of data or information is withheld, it can ruin the reputation of a business and thus all beautiful castles are upheld by pillars of trust built on the foundation of transparency.


During token sale events, many people could be involved in the contribution process and that can be a problem if the tokens will be transferred to them individually or manually one after the other. The task can be cumbersome. The job can be eased by coding the program to disburse the funds accordingly as at when due.

In a nutshell, these smart contracts have become the favorable tide for ICOs to sail on to shore. And in the case of failed projects, they can be coded ahead to refund the investors their money. It is important for investors to check as part of their due diligence if the ICO has this important feature attached to their token generation event.

If not, it would be wise to be on guard and oftentimes, they are published on GitHub and can be verified by other blockchain experts there. Even if one is inexperienced, you can pick up on the valid arguments and assessment of other experience blockchain enthusiasts.

Many blockchain networks are also considering adding this feature to their product line to ensure that other TGEs can be done through their platform. This also ensures their scalability function of the overall platform.