What is a smart contract?
A smart contract is software stored on a blockchain that holds data and functions at a specific address and runs exactly as programmed when triggered by a transaction. In Ethereum’s docs, it’s “a program that runs on the Ethereum blockchain,” composed of code (functions) and state (data).
Standards bodies echo this: NIST describes smart contracts as code and data deployed via signed transactions, executed by network nodes with identical results recorded on-chain.
Enterprises often explain them as automated “digital contracts” that execute once predefined conditions are met—no intermediary needed.
How smart contracts work (step-by-step)
- You (or an app) send a transaction that calls a function on the contract.
- Every node executes that function with the same inputs.
- If it succeeds, the blockchain records the new state (for example, updating a balance or minting a token).
- Anyone can read the contract code and state at its address. This “open API” model lets other apps compose with it.
Key properties: transparency, immutability, determinism
Public blockchains are designed to be tamper-evident. Once deployed, contract code at an address cannot be modified; developers use upgrade patterns (like proxies) to replace logic while keeping storage and an interface stable, but the original bytecode remains immutable.
Because all nodes execute the same code and agree on results, outcomes are deterministic (given the same inputs). This is why careful testing and audits matter—bugs cannot be patched in place.
Where they run: public vs. private blockchains
- Public (permissionless) networks like Ethereum allow anyone to deploy and interact with contracts, paying fees for computation and storage.
- Private/permissioned frameworks (e.g., Hyperledger Fabric) use “chaincode” to encode business rules among known participants—common in enterprise settings.
Popular platforms & languages
- Ethereum & EVM chains: Contracts typically written in Solidity or Vyper and run in the Ethereum Virtual Machine (EVM).
- Solana: Contracts are called “programs” and are written mainly in Rust; users interact by sending instructions.
Gas & fees in plain English
Executing contract code costs “gas.” With Ethereum’s EIP-1559 mechanism, each block has a base fee (adjusts with congestion) that is burned, plus an optional priority fee (tip) to incentivize inclusion. Wallets estimate fees automatically.
Tokens & standards (ERC-20, ERC-721)
Smart contracts can issue tokens that follow common interfaces so wallets and apps interoperate out of the box:
- ERC-20 for fungible tokens (all units interchangeable).
- ERC-721 for non-fungible tokens (NFTs, each unique).
Oracles: bringing real-world data on-chain
Blockchains can’t fetch web data by themselves. Oracles feed external information (prices, weather, proofs) into smart contracts so they can react to real-world events.
Common uses today
- DeFi & tokens: Exchanges, lending, and stablecoin infrastructure built from composable contracts and token standards.
- NFTs & media: ERC-721 contracts for unique digital items and access rights.
- DAOs & on-chain governance: Rules and treasuries enforced via contracts instead of a centralized operator.
- Enterprise workflows: Private networks using chaincode for shared business logic and auditability.
Risks & how to stay safe
Smart contracts can control significant value—bugs and design mistakes are costly. Common pitfalls include reentrancy and misconfigured upgrade/proxy logic. Use vetted libraries, audits, and battle-tested patterns. Beginners should prefer well-known apps and avoid interacting with unverified contracts.
Getting started—no money required
- Experiment on Sepolia (Ethereum testnet) where tools and faucets provide free test ETH.
- When you do go on-chain, start with tiny amounts and read contract pages on explorers (ABI, source verification, transactions) before interacting.
Quick FAQ
Are smart contracts “legal contracts”?
They’re programs that can enforce parts of an agreement automatically. Whether they’re legally binding depends on your jurisdiction and whether traditional contract elements are met. England & Wales’ Law Commission says existing law can accommodate smart legal contracts. Consult local counsel for specifics.
Can deployed code be changed?
Not at the same address. Developers can design upgradeable systems (proxy patterns) to point to new logic, but immutability of deployed bytecode remains.
Do all blockchains use the same smart-contract language?
No. Ethereum uses Solidity/Vyper; Solana uses Rust-based programs; Hyperledger Fabric uses chaincode in languages like Go/Node/Java.
