If you've spent much time researching cryptocurrency investments, you've probably heard of smart contracts, which are contracts that can self-execute. Although the idea was already around well before crypto, blockchain technology has significantly advanced the use of smart contracts.
Several top cryptocurrencies now have blockchains with smart contract functionality, and they're opening up a world of possibilities in finance and other fields. These potential use cases also make cryptocurrencies with smart contracts a popular investment opportunity.
What are smart contracts?
Smart contracts are programs written on the blockchain that self-execute when certain conditions are met. They use code to define and enforce the rules of the contract. Once a smart contract is deployed, it runs autonomously, and there's no need for an intermediary to ensure that the contract is fulfilled.
When a smart contract is created, it exists on a blockchain. The blockchain is a public ledger that records all of a cryptocurrency's transactions. Cryptocurrencies with smart contract capabilities have blockchains that can also store and run smart contracts.
Smart contracts allow cryptocurrencies to offer much more than a role as a digital currency that can transfer funds from point A to point B. Blockchains with smart contracts can build entire systems of decentralized finance (DeFi) that can operate on their own without needing a central governing body.
How do smart contracts work?
Every smart contract can be boiled down to an if-then statement. If one or more conditions are met to fulfill the terms of the contract, then the contract executes.
One of the original and most straightforward examples used to explain smart contracts is a vending machine. If you insert the correct amount of money and make a selection, then the vending machine dispenses the item you chose. The terms of the contract are clear, and the transaction happens on its own.
While a single smart contract is responsible for one action, multiple contracts can be bundled together to handle more advanced tasks. That's how decentralized applications (dApps) work, and they make smart contracts much more useful.
For an example of how a dApp works, we can look at decentralized crypto exchanges. These exchanges let users swap one cryptocurrency for another through various smart contracts.
Here's a quick explanation of the smart contract conditions that can make a swap happen:
About the Author
