What are smart contracts?

Smart contracts are self-executing digital agreements written in computer code that exist on blockchain networks. They have become an essential technology in the continued evolution of cryptocurrencies, playing a key role in the creation and inner workings of decentralized applications (DApps).

A closer look at smart contracts

Smart contracts are coded digital agreements written to blockchain networks. Once deployed, they typically cannot be changed or deleted. This technology significantly reduces the need for trusted intermediaries when creating and enforcing agreements. Unlike traditional contracts that require lawyers to draft and mediators to oversee disputes, smart contracts' terms are written in publicly auditable, immutable code that automatically executes when specific conditions are met.

These digital agreements serve as the building blocks of decentralized applications (DApps). Their interoperability allows them to be stacked, creating increasingly sophisticated products that function without oversight or involvement from intermediaries, including their creators. This characteristic has led to the phrase "money lego" being used to describe smart contract-based applications.

The origins of smart contracts

The term "smart contract" was coined by Nick Szabo, a cryptographer, computer scientist, and early digital-money pioneer. In a 1994 essay, Szabo described computerized agreements that would automatically execute when predefined conditions were met. However, the technology to implement such contracts was not available at the time.

The creation of Bitcoin provided the technological foundation for smart contracts. While Bitcoin allows for simple smart contracts, more sophisticated programming languages are typically used for writing smart contracts on platforms like Ethereum, Solana, Avalanche, Polkadot, and Cardano.

Ethereum, launched in 2015, is widely credited with bringing smart contracts to the crypto space. The project aimed to extend the functionality of the pioneering blockchain technology introduced by Bitcoin in 2009. Ethereum's smart contracts run on the Ethereum Virtual Machine (EVM), a digital software responsible for code execution and smart contract deployment.

How smart contracts work

Smart contracts are written in programming languages such as Solidity, Vyper, and Rust, with Solidity being the most popular for coding Ethereum-based smart contracts. These languages are used to build smart contracts with predefined rules and logic, often following an "if X happens, then do Y" structure.

Once written, the code is compiled into a machine-readable format called bytecode. The blockchain can understand bytecode and execute the rules of the smart contract accordingly. As users interact with a contract, the blockchain responds by automatically executing the correct action through a transaction, which is paid for using a gas fee.

How smart contracts are used

Smart contracts are the cornerstone of much blockchain innovation. They have enabled developers to monetize digital artwork and collectibles, and are instrumental in decentralizing the financial (DeFi) industry. Some notable examples of smart contract applications include:

1. Aave: A decentralized, non-custodial borrowing and lending protocol that allows users to earn returns and borrow assets by depositing them into liquidity pools.

2. Civic: A personal identity verification service that provides secure and low-cost identity verification services, giving users total control over their personal information.

3. Decentralized exchanges: Leading platforms that rely on smart contracts to determine token prices in liquidity pools, enabling trades to be completed in a fully decentralized manner.

The final word

Smart contracts are undeniably the backbone of the modern crypto space, playing a fundamental role in the operations of DApps and pioneering blockchain projects. By removing the need for centralized intermediaries, smart contracts support a core principle of cryptocurrency: decentralization. Their importance to the industry cannot be overstated, and as demonstrated by the examples provided, smart contracts are being utilized in diverse ways, with the potential for even more innovative applications in the future.

FAQ

What are smart contracts?

Smart contracts are self-executing digital agreements stored on blockchain. They automatically enforce and execute terms when predefined conditions are met, without intermediaries.

What is an example of a smart contract?

A popular example is a decentralized exchange (DEX) contract that automatically facilitates token swaps between users without intermediaries.

Is bitcoin a smart contract?

No, Bitcoin is not a smart contract. It's a decentralized cryptocurrency that uses blockchain technology, but lacks the programmable functionality of smart contracts found in platforms like Ethereum.

What is the difference between smart contracts and blockchain?

Blockchain is the underlying technology, while smart contracts are self-executing programs that run on blockchain. Blockchain stores data, smart contracts automate processes.