A smart contract is simply a program that runs on a blockchain. It is written and executed in code, and it resides on a specific address on the blockchain.
Similar to traditional contracts which spell out terms of agreement between two parties, smart contracts define rules and governance of a project via code. The code is transparent and publicly verifiable. Smart contracts are also self-executing and do not require an intermediary to enforce rules.
Thus, smart contracts are decentralized and trustless.
What are they used for?
Smart contracts are a foundational technology for many blockchain-based ecosystems. In fact, they are the cornerstone of DeFi.
Developers have built all kinds of tokens and decentralized apps (DApps) with smart contracts. Today, there are thousands of DApps across popular blockchains, spanning major use cases like lending/borrowing, liquidity pools, crypto exchanges, gaming and more.
Prominent DApps include:
- ApolloX DEX: Smart contracts allow users to trade crypto without intermediaries
- Yearn.finance: DeFi protocol which uses smart contracts to optimize yield earnings
- Terra Protocol: Utilizes smart contracts to peg its stablecoin to USD in a 1:1 ratio
Smart contracts are executed by blockchain nodes which process transactions submitted by users. Users have to pay gas fees for each transaction to keep the blockchain running.
How are smart contracts created?
Anyone who learns a smart contract programming language like Solidity can write code and deploy the completed smart contract on the blockchain.
One limitation is that smart contracts cannot be altered (usually) after being deployed. To ‘update’ the contract or migrate to a new contract altogether can succeed, but often takes time and effort.
Ethereum is the dominant smart contract blockchain today, though other blockchains like BNB Chain, Cardano and Polkadot have been increasingly expanding market share.
Blockchains created after Ethereum are also often Ethereum Virtual Machine (EVM) Compatible, which means that smart contracts written on Ethereum can run on them as well. This makes it easier for developers to port their DApps over to alternative blockchains.
Smart contracts are here to stay
Mainstream adoption of blockchain technology continues to advance while smart contract technology develops at a rapid pace.
Its key function of determining and enforcing terms of agreement opens up the possibility of smart contracts becoming commonplace in future - even in industries outside of crypto.
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
Risk Reminder: Crypto trading carries a risk. All trading activities are done at your discretion and at your own risk. The information here should not be regarded as financial or investment advice from ApolloX. ApolloX will not be liable for any loss that might arise from your use of any financial product.
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