What are Smart Contracts?

Smart contracts are programs written on the blockchain that execute automatically when certain conditions are met. They use code to define and enforce the rules of the contract. Once a smart contract is deployed, it runs autonomously and there is no need to use an intermediary to ensure that the contract is fulfilled.

When a smart contract is created, it exists on a blockchain. The blockchain is a public ledger that records all transactions of a cryptocurrency. Cryptocurrencies with smart contract capabilities have blockchains that can also store and execute smart contracts.

Smart contracts allow cryptocurrencies to offer much more than just a role as a digital currency to transfer funds from point A to point B. Blockchains with smart contracts can build entire decentralized finance (DeFi) systems that can operate autonomously without the need for a central governing body.

Each smart contract can be summarized as an "if-then" statement. If one or more conditions are met to fulfill the terms of the contract, it is executed.

One of the original and simplest examples used to explain smart contracts is that of a vending machine. If you insert the correct amount of money and make a selection, the vending machine dispenses the item you have chosen. The terms of the contract are clear, and the transaction takes place on its own.

If a single smart contract is responsible for an action, multiple contracts can be grouped together to manage more advanced tasks. This is how decentralized applications (dApps) work, which make smart contracts much more useful.

To illustrate how a dApp works, we can look at decentralized cryptocurrency exchanges. These exchanges allow users to exchange one cryptocurrency for another through various smart contracts.

Here is a quick explanation of the terms of the smart contracts that make an exchange possible:
• If a user requests an exchange of USD Coin (CRYPTO:USDC) for Compound (CRYPTO:COMP), a smart contract will retrieve the current price and provide it.
• If the user accepts the transaction and sends the USD Coin, a smart contract will send them back the Compound.

There are all sorts of potential uses for smart contracts in various industries, including finance, law, and gaming.

Finance is a natural fit for smart contracts, and so far, we’ve seen them used to build complex DeFi systems. These platforms provide similar types of services as financial institutions, but they’re all decentralized and run on blockchain technology.

Here are some of the ways smart contracts can provide financial services:
• Users can lend their own cryptocurrency funds to a smart contract with a decentralized exchange to become liquidity providers.
• The decentralized exchange uses those funds to facilitate cryptocurrency trading and lending.
• People can trade cryptocurrencies or put up collateral and receive a loan on the exchange. Smart contracts execute these transactions and collect transaction fees.
• Liquidity providers receive a share of the transaction fees as a reward for lending their cryptocurrency funds.

Through a series of smart contracts, a decentralized exchange accomplishes all of this without a central governing body. There are no banks or payment processors involved in the transactions. Users can trade cryptocurrencies and borrow or lend and earn interest, and it all happens without an intermediary.

Smart contracts are also well-suited to the legal field. If they’re ever considered legally binding contracts, smart contracts could reduce the time and costs involved in executing business transactions.

We can’t discuss smart contract use cases without mentioning non-fungible tokens (NFTs), which have become very popular. An NFT is any type of unique digital asset stored on a blockchain. A smart contract records and stores the NFT’s unique information. Ownership information is also recorded in smart contracts.
Many NFTs are essentially collectibles such as digital art, but that’s not their only purpose. Blockchain-based games such as Axie Infinity (CRYPTO:AXS) have characters that come in the form of NFTs. When players buy a new character, they’re buying an NFT with its stats and other information stored on the blockchain in a smart contract.

Here are the main benefits of smart contracts:
• They’re a cost-effective way to do business. Because smart contracts operate autonomously and execute themselves, they reduce the need for intermediaries. No one needs to confirm whether the terms of the contract have been met or pay out the contract itself, which means smart contracts can be used without unnecessary fees.
• They’re fast. A smart contract can execute immediately when its conditions are met. There’s virtually no waiting time, which is one reason these contracts work so well for financial services and cryptocurrency trading.
• They offer complete transparency. Every smart contract has clear terms that all involved parties can review and agree to. Smart contracts are also irreversible, so once they’re executed, no one can dispute the results.
• They’re trustworthy for all involved parties. Smart contracts eliminate the possibility of bias affecting an agreement. The terms can’t be manipulated to favor one party or the other. The only thing that matters is whether the conditions are met.
Considering how smart contracts could improve the traditional contract system, they’re something to keep in mind when deciding which blockchain stocks and cryptos to buy.

If you have a smart contract idea, the first thing to do is determine where you’re going to write it. There are many cryptocurrency blockchains with smart contract functionality. Because they all have their own platforms and architectures, writing a smart contract is different depending on which blockchain you choose.

Here are some of the top cryptocurrency blockchains for writing smart contracts:
• Ethereum (CRYPTO:ETH) introduced smart contract capabilities using blockchain technology, which helped make it the second-largest cryptocurrency and the most popular platform for building dApps. Its smart contract platform is called Ethereum Virtual Machine (EVM), and its programming language is called Solidity.
• Cardano (CRYPTO:ADA) is the first blockchain platform founded on peer-reviewed research. Its smart contract platform is called Plutus, and its programming language is called Haskell. It also has a domain-specific language, Marlowe, for financial contracts.
• Solana (CRYPTO:SOL) is designed to be the fastest blockchain, and it can reportedly process 65,000 transactions per second. It uses three programming languages: Rust, C, and C++.
After you’ve chosen a blockchain, visit its website and go to the section on creating smart contracts. All the major blockchains have plenty of information and educational guides among their resources. The best way to learn how to create a smart contract is to review the information provided by a specific blockchain.

Smart contracts are one of the main reasons people are excited about both blockchain technology and investing in cryptocurrencies. Even if you don’t plan to write your own smart contract, it’s worth knowing the basics of how they work and which blockchains have this functionality, because they’ll play a major role in determining the success of individual cryptocurrencies.