Smart Contracts

Smart contracts are programs stored on a blockchain that automatically carry out actions when specific conditions are met.

They allow agreements and processes to function according to predefined rules without relying on a central authority to execute them.

Why smart contracts exist

Traditional agreements often require intermediaries to enforce rules or confirm outcomes.

Smart contracts were created to reduce reliance on intermediaries by embedding rules directly into software that executes automatically.

How smart contracts work

Smart contracts are written as code and deployed to a blockchain.

Once deployed, they execute according to their programmed conditions. When those conditions are met, the contract performs its function without manual intervention.

What smart contracts are used for

Smart contracts are used in a wide range of applications, including:

• Token creation and management
• Decentralized exchanges
• Lending and borrowing systems
• Digital collectibles and NFTs

The specific use depends on how the contract is designed.

Limitations and risks

Smart contracts operate exactly as written, which means errors in code can have consequences.

They do not interpret intent or context, and changes after deployment may be difficult or impossible. Understanding these limitations is important before interacting with smart contract systems.

Common misunderstandings

Smart contracts are sometimes misunderstood as legal contracts or guarantees.

In practice, they are software programs that follow code-based rules. They do not replace legal agreements and do not eliminate all risk.

Key takeaway

Smart contracts enable automated processes on blockchains without centralized control.

They expand what blockchains can do but require careful design and understanding.

Next lesson

Smart contracts enable new types of digital assets that behave differently from traditional cryptocurrencies.

The next lesson explains the difference between coins and tokens.

Read: Coin vs Token →