What is a Smart Contract?

A smart contract is code deployed on a blockchain that automatically executes when predetermined conditions are met. Unlike traditional contracts requiring intermediaries, smart contracts are self-enforcing.

How Smart Contracts Work

Simple Example

IF buyer sends 1 ETH
THEN transfer NFT to buyer
  1. Buyer sends ETH to contract
  2. Contract verifies payment
  3. Contract automatically transfers NFT
  4. Transaction recorded permanently

Key Properties

  • Automatic execution - No manual intervention
  • Immutable - Can’t be changed after deployment
  • Transparent - Code is publicly visible
  • Trustless - No intermediary needed

Smart Contract Platforms

Ethereum

  • First smart contract platform (2015)
  • Most DeFi and NFT activity
  • Solidity programming language

Other Platforms

  • Solana - High speed, Rust language
  • BNB Chain - Ethereum-compatible, lower fees
  • Cardano - Formal verification, Haskell-based
  • Avalanche - Fast finality, EVM-compatible

Real-World Applications

DeFi (Decentralized Finance)

  • Lending protocols (Aave, Compound)
  • Decentralized exchanges (Uniswap)
  • Yield farming (Yearn)

NFTs

  • Ownership records
  • Royalty payments
  • Marketplace transactions

DAOs

  • Governance voting
  • Treasury management
  • Proposal execution

Other Uses

  • Insurance payouts
  • Supply chain tracking
  • Identity verification

Smart Contract Lifecycle

1. Development

  • Write code (Solidity, Rust, etc.)
  • Test extensively
  • Audit for security

2. Deployment

  • Pay gas fee
  • Code stored on blockchain
  • Receives unique address

3. Interaction

  • Users call functions
  • Pay gas for execution
  • State changes recorded

4. Immutability

  • Can’t be modified
  • Only “upgraded” via proxy patterns
  • Or abandoned (funds may be locked)

Smart Contract Risks

Code Vulnerabilities

  • Reentrancy attacks - Recursive calling
  • Integer overflow - Math errors
  • Access control - Unauthorized functions

Famous Hacks

  • The DAO (2016) - $60M stolen
  • Wormhole (2022) - $320M exploit
  • Ronin (2022) - $600M bridge hack

Mitigation

  • Use audited contracts
  • Check audit reports
  • Start with small amounts
  • Use established protocols

Auditing Smart Contracts

What Auditors Check

  • Logic errors
  • Security vulnerabilities
  • Gas optimization
  • Best practices

Top Audit Firms

  • Trail of Bits
  • OpenZeppelin
  • Certik
  • Consensys Diligence

Reading Audits

  • Check if issues were fixed
  • Severity of findings
  • Scope of audit

Smart Contracts and Exchanges

Most exchanges interact with smart contracts:

  • Depositing to DeFi from Binance
  • Trading on DEXs
  • Staking protocols

Understanding smart contract risks helps evaluate DeFi opportunities.

The Future

  • Formal verification - Mathematical proof of correctness
  • Layer 2 - Cheaper execution
  • Cross-chain - Contracts spanning multiple blockchains
  • AI integration - Automated contract creation