What Are Smart Contracts?

Last Modified:
August 1, 2024

Smart contracts are programs on a blockchain that automatically execute instructions whenever certain conditions are met.

Think of them like vending machines, where you put in money to get an item without needing anyone's help. Once you give a smart contract what it needs to complete a task, it will automatically do it for you.

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How do smart contracts work?

First, a developer writes the code for the smart contract. This code outlines the exact conditions that need to be met for the contract to be executed and the exact actions the smart contract will perform.

Code for the smart contract of an NFT

The smart contract code is then deployed onto a blockchain network. Since blockchains are distributed ledgers, a copy of the code is replicated and stored across the entire network of computers. Once deployed, the code cannot be modified. Therefore, if an application using a smart contract needs to be updated, then it will have to upgrade to a new smart contract.

To execute the smart contract, you interact with it through a platform, such as a crypto wallet or a decentralized app. You might want it to send crypto from your wallet to another  wallet address. When you fulfill the conditions written in the contract (such as having enough crypto in your wallet, having the right type of token, etc.), the code within the smart contract executes automatically. Once activated, it takes the funds from your wallet and sends it to the recipient's address.

Smart contracts can perform many different actions, such as selling assets online, creating tokens, retrieving specific data, or triggering other smart contracts.

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For example, a smart contract might have a condition stating that if a buyer sends a specific amount of crypto to a certain wallet address, then an NFT will be sent to the buyer’s wallet and the funds will be released to the seller.

Since all transactions within a smart contract are recorded on the blockchain, you can view or audit them at any time. Because the code is stored on the blockchain, you generally cannot edit a smart contract once it has been deployed. This keeps the transactions secure and prevents anyone from secretly tampering with the records or the terms and conditions agreed upon.

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