What Is A Smart Contract?

A smart contract is a digital contract that is programmed to execute specific functions when certain parameters are met between the parties involved. Built on blockchain networks like Ethereum, smart contracts are valuable assets in web3 technology. They are powerful in their ability to enforce agreements and provide security even among parties who have never met.

How a smart contract works

One way to explain how smart contracts work is with a vending machine. A buyer and a merchant can conduct honest business without ever having to meet in person or even trust each other. The buyer inserts money into the vending machine, punches in a code to select the item, and the machine delivers the item automatically. 

Similarly, a smart contract executes a pre-programmed code script between two parties who do not know each other. Not only do they not need to know or trust each other, but both parties can remain anonymous. 

Conversely, whereas vending machines sometimes fail to deliver a product, smart contracts can be optimized to ensure strict enforcement of the contract’s terms to always deliver what each party expects.

Smart contract examples

Smart contract use cases vary widely throughout many industries. From real estate and fundraising to establishing a business and gaming, smart contracts have proven their worth.

1. Granting a payee title ownership to a house after escrow funds are received.

2. Fundraising for a startup from anonymous investors.

3. Establishing bylaws and organizational structure to a business or organization.

4. Lending cryptocurrency between lenders and borrowers in a staking pool.

5. Play-to-Earn games allow players to earn tokens after they stake a small amount.

6. Minting NFTs

Smart contract applications

Popular smart contract applications include:

1. Uniswap (UNI)

   • A decentralized trading protocol that manages trades of DeFi tokens.

2. KlimaDAO (KLIMA)

   • A project focused on decreasing carbon emissions by accelerating carbon asset price growth. KlimaDAO tokens are tokenized carbon credits users can buy.

3. AxieInfinity (AXS)

   • The largest GameFi platform in web3 today, AxieInfinity allows players to earn token rewards for playing in its battle royale style game.

4. TTCasino

   • This gambling dApp allows players to engage in thousands of different games and bet on the outcomes. Users can also connect their wallets and bet on sports.

5. ArtBlocks

   • A generative art collection where users create various works of art using code. The artworks are stored on the blockchain and can be bought by patrons.

Smart contracts and web3

Smart contracts are perhaps the centerpiece of blockchain technology applications in the real world. They power dApps and much of the DeFi industry. Indeed, a majority of web3 technology is built on smart contracts which are built on blockchain networks like Ethereum.

These technologies will only continue to grow in the coming years as their usefulness is more and more applied in the marketplace and elsewhere. This is where Ethereum has gained such a foothold in the market. 

Bitcoin dominates the market with its cryptocurrency blockchain, but it does not have a smart contract blockchain. This has led to Ethereum stepping in to fill the gap, building the largest and most popular smart contract blockchain, making its native coin, ETH, the second largest crypto by market cap, behind Bitcoin.

Smart contracts’ ability to revolutionize how the software operates, how contracts are defined and enforced and the anonymity they provide all parties is crucial in a world that is starved for privacy and security.