A smart contract is a program that runs on the Ethereum blockchain. Once deployed, it executes its code automatically and immutably — without any central authority needed. Smart contracts are the reason Ethereum is more than just a cryptocurrency.

Think of a vending machine: you insert money, press a button, and get your drink — no cashier needed. A smart contract works similarly, just on the blockchain: it defines rules, checks conditions, and executes actions automatically.

How Does a Smart Contract Work?

Smart contracts are written in Solidity — a programming language designed specifically for Ethereum. The code is compiled and stored as bytecode on the blockchain. Every node in the network can execute the code and verify the result.

The flow is always the same: a transaction calls a function of the contract. The Ethereum Virtual Machine (EVM) executes the code. The result is stored on the blockchain. Nobody can manipulate the result because thousands of nodes verify it simultaneously.

Important: once a smart contract is deployed, its code cannot be changed. That's why audits and testing before deployment are so crucial. Bugs in the code can have catastrophic consequences — as the DAO hack in 2016 demonstrated, when $60 million was stolen.

What Are Smart Contracts Used For?

Decentralized Finance (DeFi)

DeFi is the largest application of smart contracts. Protocols like Uniswap, Aave, and MakerDAO enable swapping, lending, and borrowing crypto — without a bank. Smart contracts manage billions of dollars in liquidity fully automatically.

NFTs (Non-Fungible Tokens)

Every NFT is a smart contract that assigns uniqueness and ownership to a digital object. The ERC-721 standard defines how NFTs work on Ethereum. Marketplaces like OpenSea use smart contracts for automated trading.

DAOs (Decentralized Organizations)

DAOs are organizations governed by smart contracts. Members vote on proposals, and the contract automatically executes the decision — for example, disbursing funds or changing parameters.

Stablecoins

Stablecoins like DAI are managed by smart contracts. The MakerDAO contract ensures that DAI is backed by crypto collateral and maintains its $1 peg.

Risks of Smart Contracts

Code bugs: Since smart contracts are immutable, bugs cannot simply be fixed. Attackers actively search for vulnerabilities. That's why every serious contract should be audited by independent security firms before deployment.

Reentrancy attacks: One of the most well-known vulnerabilities. A malicious contract calls a function repeatedly before the first execution completes — draining the funds. The DAO hack was based on exactly this attack.

Oracle manipulation: Smart contracts cannot access external data on their own. They use oracles (e.g., Chainlink) to get prices or other data. If an oracle is manipulated, the contract makes incorrect calculations.

Approval risks: When you give a DeFi contract access to your tokens (approval), that contract can move your tokens. Check approvals regularly on revoke.cash and revoke unnecessary permissions.

Smart Contract Safety for Users

You don't need to be a programmer to use smart contracts safely. Follow these basic rules:

Only use audited protocols. Major DeFi protocols like Uniswap, Aave, and Lido have been audited multiple times by reputable firms like Trail of Bits and OpenZeppelin.

Verify the contract address. Before interacting with a contract, compare the address with the project's official website. Scammers deploy fake contracts with similar names.

Start with small amounts. Test new protocols first with an amount you can afford to lose.

Understand token approvals. Every time you "Approve" a contract, you allow it to move your tokens. Only approve the necessary amount and revoke old approvals regularly.

The Future of Smart Contracts

Smart contracts are constantly evolving. Account Abstraction (ERC-4337) makes wallets smarter and more user-friendly. Layer 2 solutions like Arbitrum and Optimism drastically reduce costs. And with increasing standardization, interacting with smart contracts is becoming easier for end users every day.

The vision: a world where financial products, digital ownership, and organizational structures run transparently and automatically on the blockchain — without intermediaries.

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