What are Smart Contracts?

Updated on 30 June, 2022 2:06 PM
1 min read

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    In the world we live, everything that we do is based upon a contract that serves as proof of what is happening. A contract is a legal document that is made between two or more parties that govern the relationship, rights, and obligations involved between them. In the current world, we need a third party to enforce these centralized contracts. 

    While the world is moving towards a decentralized world, the requirements of contracts still stay the same i.e to govern and check the obligations. To solve this problem, the concept of smart contracts was introduced. 

    What Are Smart Contracts?

    In a decentralized world, smart contracts are contracts that are self-executing in nature, without any involvement of a third party governed by the lines of code. 

    As per the official Ethereum website, “A smart contract is simply a program that runs on the Ethereum blockchain. It's a collection of code (its functions) and data (its state) that resides at a specific address on the Ethereum blockchain”

    Almost the entirety of DeFi is powered by smart contracts.

    How do smart contracts work?

    The term smart contracts was first coined by Nick Sabzo in the year 1994. Though smart contracts have the functionality to work on a lot of chains, they currently remain native to Ethereum. Before reading any further, you should read about what is Ethereum and how does it work.

    A smart contract can be written in multiple programming languages such as solidity, web assembly, etc. A smart contract on the Ethereum blockchain is accessible to all the nodes and the contract’s code is open to inspection. 

    On the blockchain, every node has the accessibility to store the smart contract which is by the very nature of decentralization

    How does a smart contract get executed? 

    1. For a smart contract to be executed, it needs to receive funds from the users. The execution is done by all the nodes on the network to reach a consensus and make the contract executable. 
    2. For a contract to be executable, a user has to also pay a small fee on the network which is called the “gas fee” 
    3. Once deployed onto a blockchain, smart contracts generally can’t be altered, even by their creator. 

    Top Applications of Smart Contracts


    Uniswap is a cryptocurrency exchange that facilitates the trading of Ethereum and other tokens in a decentralized manner i.e without the involvement of any third party. It has low trading fees, a self-custodial approach (users retain full custody of their funds), and a wide range of tokens available for trading. 


    MakerDAO is one of the first cryptocurrency lending platforms in its digital currency called Dai. It allows users to borrow and lend using a decentralized application, with no middleman taking part in the proceeds.

    Axie Infinity

    Axie Infinity is a blockchain smart contract-based play-to-earn game. Axies, which are NFTs, can be bred and traded on the platform, making it a popular choice for gamers and collectors. In 2021, Axie Infinity was responsible for two-thirds of all NFT transactions in the blockchain gaming industry, amounting to about US$ 3 billion+.


    As the world is progressing towards to decentralized world, the requirements on the web still remain the same as in the centralized world. This includes banking, lending, exchanging, social media, etc. To solve this problem, given their application and usability, smart contracts would play an important role in building digital contracts and executing the same. 

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