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What are Smart Contracts in Crypto?

Aaron Moses by Aaron Moses
August 2, 2021
in Education
Reading Time: 3 mins read
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Smart contracts are the backbone of the blockchain industry. Ethereum, Solana, Polkadot and Cardano are all working on making smart contracts possible and accessible. But what exactly are smart contracts and what can they be used for?

The automated law on the blockchain

Smart contract are a programmed code which set the rule of law on a given blockchain. As these codes are designed to be self-executed this law will always be followed when certain parameters are met. They do not need a person or a third party to enforce this law. A smart contract can, for example, be the terms of an agreement between buyer and seller. Once the terms are being put into code, they are distributed onto the blockchain. The code will. then control the execution of these terms, and transactions are trackable and cannot be reversed.

One way to think of a smart contract is at a Lemonade Stand. The kid who is selling lemonade has determined that one Lemonade equals $2. Therefore, if a person gives the kid a $10 bill, then he knows to return $8. A smart contract would replace the kid. It knows the terms of the buyer and seller an self-executes the transaction.

So, on the Ethereum blockchain, it knows, for example, how many tokens of token B to send a buyer in exchange for token A.Of course oracle networks help DeFi and smart contracts with price data, but smart contract is the law which transactions follow. Any developer can come to the Ethereum network and write their own smart contracts. However, all smart contracts on Ethereum are written in the same programming language – solidity.

What smart contracts can be used for

As we’ve discussed before, Ethereum is not the only smart contract protocol in crypto. Others include EOS, Cardano, Solana, and Polkadot. However, one shouldn’t get caught up with the word “smart contracts”. As Ben Goertzel says on the Joe Rogan podcast:

“Smart contract is sort of a misnomer cause a smart contract doesn’t have to be either smart or a contract. Really, it’s like a programmable transaction.”

But what is the use case of smart contracts in crypto? Essentially smart contracts allow for transactions to happen without the need of a trusted third party. This is what is known as automation – the process of taking away another entity to oversee transactions. Often times human intermediaries have the error of trust. Would a person acting as a third party overseer in a transaction potentially look to exploit the two central parties in an exchange? Of course, it’s possible. A non-human entity such as an automated program on the other hand can be totally transparent and therefore more trustworthy.

However, this isn’t to say that smart contracts are perfect. And there’s still room for exploitation in crypto and blockchain. There have been a handful of times where hackers found loopholes within the codes of certain smart contracts. Over time, however, the code of these smart contracts become more and more secure as mistakes and loopholes are constantly found and fixed.

One of the greatest outcomes that came from smart contracts was the invention of stablecoins. With smart contracts, coins can be pegged to fiat currencies such as the U.S. dollar without having to keep real dollars in supply.

Other uses for smart contracts besides crypto

So, if finance can be automated as shown in DeFi, could the world of law be automated also? It seems that as of right now, there will always need to be a human element in the world of law as law is something that alters over time. However, smart contracts could certainly be used in the field and would streamline the tedious tasks involved in legal services which would free up the time of law professionals.

Smart contracts could also be implemented in the food supply chain to help maintain transparency in food safety.

Final thoughts

Smart contracts are the pillar of DeFi. Without smart contracts, the crypto industry would only be worth a small fraction to what it is worth today.

If you enjoyed this article, you might also want to read What Is Karura? The DeFi Hub of Kusama.

Aaron Moses
Aaron Moses

Aaron is passionate about blockchain and has been an investor in cryptocurrencies for the past years. He enjoys engaging with other people in the cryptocurrency community online, particularly on Telegram, and learning from experts.

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