EXPLAINER: How Smart Contracts Work

A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. 

For instance, the Ethereum blockchain, which thrust the technology to the limelight, is a collection of code (its functions) and data (its state) that resides at a specific address on the blockchain.

Famed for adding functionality to the blockhain, here are some features of Ethereum:

  • Permissionless: Anyone can write a smart contract and deploy it to the network
  • Composability: Different smart contracts can interact with each other
  • Immutable: The rules programmed into a smart contract can’t be changed once they are live on the blockchain
  • Efficiency and Objectivity: As programs, smart contracts do what they are “told” or pe-programmed to do
  • Trustlessness: They do away with the need to appoint an intermediary that both parties trust to ensure the terms of a contract pass as each party expects


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How Smart Contracts Work

Smart contracts work by following simple “if/when…then…” statements that are written into code on a blockchain. These statements represent conditions and the action to take regarding a given issue.

A network of computers executes the actions when predetermined conditions have been met and verified. The blockchain is then updated when the transaction is completed.

For example, a smart contract can be programmed to release a new character in a video game once the player achieves a certain milestone. Another example would be the release of funds to a wallet once a particular condition is met etc.

These are just some of the ways smart contract technology is being applied in the DeFi and GameFi communities today.

The contracts are also being used in decision making whereby DAOs are coding their rules so that they execute when certain conditions are met – removing human interference from the decision-making process.

Users need to have programming skill to be able to write instructions for a smart contract to execute. On Ethereum, they have created Solidity, a simple language which is similar to JavaScript that users can use to build smart contracts.

However, as the blockchain industry evolves, smart contracts are expected to get easier to create even for non-developers.


RECOMMENDED READING: Smart Contracts for Democracy: A Look at How Decentralized Autonomous Organizations (DAOs) are Organized and Run


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