Smart contract

A smart contract is a digital contract that automatically carries out agreements. This happens once preset conditions are met.

What is a smart contract?

The agreements are written as code on a blockchain. A blockchain is a digital record of information that is difficult to change.

The contract does exactly what the code says. This usually means no third party, such as a notary or arbitrator, is needed. The outcome is visible to the people involved and generally cannot be reversed once the contract has been carried out, unless this is specified in advance.

An example of a smart contract

Suppose a buyer and seller want to transfer ownership of a house. They set the price, closing date, and an approved inspection as conditions in a smart contract.

Only when all the conditions have been met can the contract automatically carry out the payment and transfer of ownership. This example shows that the contract does not negotiate on its own, but carries out agreements made in advance.

Why are smart contracts important in crypto?

Smart contracts are the foundation of many crypto apps. For example, they’re used in DeFi: financial services provided through decentralized apps. NFTs also use them to create and trade NFTs and pay out royalties.

In crypto news, you may read that a project is launching or updating a new smart contract. This can be important because the code determines how a service works and what users can do with it.

Automatic doesn’t always mean error-free. A bug or vulnerability in the code can be exploited. Using a smart contract usually also comes with transaction fees. So read carefully about what a crypto app does before trading with it or linking your tokens to it.