What Exactly is a Smart Contract?

 

Smart contracts are a huge part of the crypto and blockchain industry, being used by tens of thousands of people every day. They are one of the most significant technologies to come out of the industry, and if it wasn’t for them, then cryptocurrency would not be as useful as it is today and many tools such as crypto loans might not exist. But what exactly is a smart contract, and how does one work?

 

Ethereum and the smart contract

 

Smart contracts were first introduced by Ethereum, where they were presented in its initial 2014 white paper as being a major selling point for the project. Essentially, they are computer programs that automatically execute once certain conditions are met, with those conditions being met by separate people. They are agreements that two or more parties enter, which then get cryptographically signed by each person. All actions within the smart contract are then written onto the blockchain, where there is a public record that others can view and assess.

 

This relatively simple technology has revolutionized the crypto industry. Before the introduction of smart contracts, cryptocurrency was not much more than a digital alternative to fiat. However smart contracts allow crypto to do so much more, such as create decentralized applications that can run without any organized body regulating them (also known as DApps). This is because smart contracts are autonomous in their actions; they do not need a third party to oversee them because the code and the blockchain do all of that.

 

Among other things, smart contracts are the powerhouse of many crypto and blockchain-based games, such as UpLand and Galaxy Blocks, as they allow for complex actions to happen automatically. They are also the reason why decentralized casinos and gambling projects can exist, such as the infamous Fomo3D, a game where every participant sends a small sum of money to one wallet, and the last person to do this wins the contents. Smart contracts have also allowed for the creation of no-loss-lotteries, where people can win money without ever actually losing anything. A popular example of this is PoolTogether.

 

Many crypto loans run on smart contracts

 

Crypto loan providers love smart contracts. They are a simple and foolproof tool that can be used to lend money and hold people’s finances in a safe and cost-effective way. Without them, DeFi (decentralized finance) crypto loans would not exist. Every DeFi loan provider uses smart contracts, and some CeFi providers do, too. In fact, some of the most fascinating and intuitive smart contracts are used for loans: namely, flash loans.

 

These are loans that lend a certain amount of money to somebody, but for a very limited amount of time (sometimes only a few seconds). This is because all the lending and borrowing happens inside one single block on the chain. These loans are actually smart contracts that contain smaller smart contracts nested inside them. The purpose of such a speedy loan is to help take advantage of arbitration on exchanges, as these opportunities usually also only last a handful of seconds.