Blockchain smart contracts and how to use them explained

Smart contracts are blockchain programs that differ from computer programs. Here’s how they work and why they’re important for Web3 apps.

Anyone who has spent time in cryptocurrency, Blockchainand Web3 finally sees the term “smart contract‘ but a lot of people don’t know what it means. Confusingly, smart contracts, although inspired by them, have nothing to do with legal contracts and are fundamentally different from web apps and computer programs. Despite being the most powerful technology to emerge from blockchain, most people have never heard of it.

Smart contracts were first conceived in 1995 by Nick Szabo (who may or may not be Satoshi Nakamoto, Bitcoin’s anonymous creator), who had the idea of ​​”transaction logs“, which automatically execute the terms of a contract between two parties over the internet. This would have been very useful as smart contracts could reduce or eliminate the risk of counterparties refusing to uphold their contract expiration, thereby avoiding costly court cases. Unfortunately, it there is no way to do this without relying on a third party hosting the contract who could potentially change the code or stop it, making the idea pointless. Also, unlike cryptocurrency, digital currency is non-programmable and bank-too -Bank money transfers are inefficient and reversible, which is why there were no smart contracts before the Ethereum blockchain went live 20 years later in 2015.


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Smart contracts are often described like regular contracts, but this is misleading and limiting. They are actually tiny programs running on a second generation blockchain (i.e. Ethereum) where crypto wallets and other smart contracts can interact with them. Almost all cryptocurrencies and NFTs are standardized smart contracts that track token balances, allowing other smart contracts to act like intermediaries or vending machines, eliminating counterparty risk in trades, transactions, and distributions. Token contracts are essential to Web3, cryptocurrency and blockchain based metaverses as they create transferrable digital property. Smart contracts can create utilities like “air drop” Contracts that transfer tokens to many accounts simultaneously, or “polyvalent” Contracts that require multiple signatures to confirm an action. Smart contracts are widely used in decentralized finance (“DeFi’), a blockchain sector replacing mainstream financial applications with smart contracts, and as of November 2021, DeFi contracts were worth almost $100 billion (according to DeFi Pulse). The smart contract features are extensive and many more are in development.

Smart contracts are very powerful, for better or for worse

Smart contracts handle money, NFTs and data

Smart contracts have many functions. Websites and web apps can invoke smart contract features and provide them with a simple interface. “Publicity“Functions are open to anyone, while sensitive functions can be restricted to authorized users/contracts. Nobody can change or stop the functions of a smart contract, and crypto/NFT transfers are irreversible and only take a few seconds. They are also reliable, and will keep running during high-volume congestion that would otherwise crash cryptocurrency exchanges. Smart contracts are autonomous”resident” of their blockchain ecosystem, require no maintenance or cost once deployed, and (with some exceptions) cannot be destroyed or modified.

Smart contracts have problems because smart contract “mistake” accounted for billions in lost/stolen cryptos over the last seven years. Since they cannot be modified, fixing a smart contract works like a manufacturer recall, where a new/updated contract is deployed and users have to move their tokens manually. Consequently, smart contracts are developed like hardware rather than software, and professional security auditing and inspection services are often hired to find vulnerabilities before launch. Smart contracts are confined to the ecosystem of their native blockchain and require the use of”bridges“to move assets to other blockchains, making blockchain bridges big targets for hackers. Finally, smart contracts are”blind” into the real world and need to be supplied with data via special services, which can cause serious problems if the data is wrong (even temporarily).

Smart contracts are the most powerful technology within the blockchain, giving rise to cryptocurrencies, NFTs, DeFi, Web3 apps, blockchain gaming, decentralized metaverse, and more. They are the engines driving blockchain adoption, receiving little credit until something goes wrong. Although their potential is enormous, developers are still unfamiliar with their quirks, as complex designs introduce more (expensive) problems and require years of trial and error beforehand Blockchain Smart contracts will be ready for mass adoption.

Next: DAOs and why they are an important part of the blockchain

Source: DeFi Pulse

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