Smart Contracts: What Are They?


Smart contracts were first introduced in the 1990s by Nick Szabo. He described a smart contract back then as a device that formalizes and secures computer networks by fusing user interfaces with protocols.

Szabo talked about the possible applications of smart contracts in a number of industries that deal with contractual agreements, including payment processing, content rights management, and credit systems.

A smart contract in the context of cryptocurrencies is a blockchain-based application or program. They often function as a digital contract that is upheld by a certain set of guidelines. All network nodes reproduce and execute computer code that contains these established rules.

Smart contracts on the blockchain make it possible to design trustworthy protocols. This implies that two parties can enter into agreements using blockchain without having any prior acquaintance or mutual confidence. They can be confident that the contract won't be carried out if the requirements aren't met. In addition, the implementation of smart contracts can eliminate the need for middlemen, substantially lowering operating expenses.

Smart contracts have been supported by the Bitcoin protocol for a long time, but Vitalik Buterin, who is also the co-founder of Ethereum, is credited for popularizing them. It's important to keep in mind, though, that each blockchain may offer a unique way to create smart contracts.

The Ethereum Virtual Machine (EVM), a crucial component of the Ethereum blockchain, will be the focus of this article's discussion of smart contracts.

How does Smart Contract Work?

A smart contract functions like a deterministic software, to put it simply. It performs a certain task when and if a set of requirements are met. As a result, "if... then..." expressions are frequently used in smart contract systems. Contrary to popular belief, smart contracts are neither contracts that are legally binding nor intelligent. They are merely some code that is running on a distributed system (blockchain).

The blockchain actions that happen when users (addresses) connect with one another on the Ethereum network are executed and managed by smart contracts. A smart contract-free address is referred to as an externally held account (EOA). EOAs are governed by users, whereas smart contracts are controlled by computer code.

Essentially, two public keys and a contract code make up an Ethereum smart contract. The contract's creator's public key is the first one made available. The second key serves as a digital ID that is specific to each smart contract and reflects the contract itself.

Any smart contract must be deployed through a blockchain transaction, and it can only be invoked by an EOA for activation (or by other smart contracts). However, an EOA is always the first trigger (user).

Key features

The following traits are frequently seen in Ethereum smart contracts:

  • Distributed. All Ethereum network nodes have copies of smart contracts that are spread throughout the network. One of the key distinctions between this and other centralized server-based solutions is this.
  • Deterministic. When the conditions are satisfied, smart contracts only carry out the tasks for which they were created. Furthermore, no matter who carries them out, the result will always be the same.
  • Autonomous. All kinds of jobs can be automated using smart contracts, which operate like self-executing software. However, if a smart contract isn't activated, it will typically remain "dormant" and do no further action.
  • Immutable. After being deployed, smart contracts cannot be modified. Only if a certain function was previously implemented are they able to be "removed". So, it is possible to assert that smart contracts can deliver tamper-proof code.
  • Customizable. Smart contracts can be programmed in a variety of methods prior to implementation. Consequently, they can be applied to develop a variety of decentralized applications (DApps). This has to do with Ethereum being a blockchain with perfect Turing.
  • Trustless. Smart contracts enable communication between two or more parties even if they don't know or trust one another. Additionally, blockchain technology guarantees correct data.
  • Transparent. Since smart contracts are built on a public blockchain, everyone can view their source code, which makes them both immutable and accessible.

Can a smart contract be modified or removed?

Once an Ethereum smart contract is in use, new functionalities cannot be added. To "destroy" the smart contract in the future and replace it with a new one, the creator must include a function named SELFDESTRUCT in the code. However, they won't be able to delete the function if it isn't already present in the code.

Notably, the so-called upgradeable smart contracts give developers more latitude when it comes to the immutability of the contracts. Upgradeable smart contracts can be made in a variety of methods, each with increasing degrees of complexity.

Let's use an abridged example where a smart contract is split up into several smaller contracts. Some of them have the "delete" function turned on, while others are created to be immutable. This means that while other capabilities can still be used, portion of the code (smart contracts) can be removed and updated.

Advantages and use cases

Smart contracts are programmable code that may be built in a variety of ways and offer a wide range of services and solutions.

Smart contracts, which are autonomous, decentralized programs, might boost accountability and lower expenses. They may also improve efficiency and cut back on administrative costs, depending on how they are implemented.

Smart contracts are very helpful when money is being transferred between two or more parties or exchanged between them.

Smart contracts can therefore be created for a wide range of use cases. Tokenized assets, voting processes, digital wallets, decentralized exchanges, games, and mobile apps are a few examples. They could also be used in conjunction with other blockchain-based solutions tackling the areas of governance, decentralized finance, supply chain, healthcare, and philanthropy (DeFi).


Tokens created on the Ethereum network adhere to the ERC-20 standard. The fundamental features of all tokens based on Ethereum are described in the standard. As a result, these digital assets are sometimes referred to as ERC-20 tokens, and they account for a sizable fraction of all currently traded cryptocurrencies.

Smart contracts were used by a lot of blockchain firms and businesses to launch their digital tokens on the Ethereum network. The bulk of these businesses distributed their ERC-20 tokens through Initial Coin Offering (ICO) occasions after the issuance. Most of the time, the implementation of smart contracts made it possible to trade money and distribute tokens in an effective and trustworthy manner.


Human-written computer code makes up smart contracts. As a result of the code's faults and weaknesses, there are several hazards involved. Ideally, they should be created and implemented by skilled programmers, especially when dealing with confidential data or significant sums of money.

In addition, others contend that the majority of the solutions and functions supplied by smart contracts may be provided by centralized systems. The primary distinction is that smart contracts operate on a decentralized P2P network as opposed to a centralized server. Additionally, because they are built on a blockchain system, they are frequently either unchangeable or extremely difficult to alter.

Being unchangeable can be excellent in some circumstances and disastrous in others. For instance, when a Decentralized Autonomous Organization (DAO) under the name of "The DAO" was compromised in 2016, errors in the smart contract code allowed millions of ether (ETH) to be taken.

Developers were unable to correct the code because their smart contract was immutable. Eventually, a hard fork occurred as a result, creating a second Ethereum chain. To put it simply, one chain "reverted" the hack and sent the money back to the proper owners (this is part of the current Ethereum blockchain). The opposing chain made the decision to refrain from interfering with the hack and declared that events that occur on a blockchain should never be changed (this chain is now called Ethereum Classic).

It's crucial to understand that the issue is unrelated to the Ethereum blockchain. Instead, a bad smart contract implementation was to blame.

The ambiguous legal status of smart contracts is another drawback. Not only is it illegal in most nations, but smart contracts also don't fit into the existing legal system.

For instance, many contracts demand that both parties be legally identified and over the age of 18. These standards could be jeopardized by the pseudonymity offered by blockchain technology and the absence of middlemen. The legal enforceability of smart contracts is a serious difficulty, especially when it comes to borderless, distributed networks, even though there are potential answers.


Some proponents of the blockchain believe that smart contracts will eventually replace and automate a significant portion of our commercial and administrative operations. Although it's conceivable, this is most likely not going to be the norm.

Undoubtedly an intriguing piece of technology, smart contracts. However, their distributed, deterministic, transparency, and degree of immutability might sometimes make them less desirable.

The main basis for criticism is that smart contracts are not a good answer for many issues encountered in the real world. In fact, some businesses would benefit more from sticking with more traditional server-based solutions.

Centralized servers are simpler and less expensive to maintain than smart contracts, and they typically display superior efficiency in terms of speed and cross-network connectivity (interoperability).

Closing Remarks

Without a doubt, smart contracts had a significant impact on the cryptocurrency industry and changed the blockchain industry. While smart contracts may not be directly used by end users, they are likely to enable a variety of applications in the future, from supply chain management to financial services.

Blockchain technology and smart contracts have the potential to revolutionize practically every aspect of our civilization. But whether these ground-breaking technologies will succeed in overcoming the numerous obstacles to widespread acceptance will only become clear with time.

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