Smart Contracts
Smart contracts are self-executing programs stored permanently on a blockchain. Once deployed, they run exactly as written — 24/7, globally, without downtime — and cannot be modified or taken down by any single party. No bank, company, or government controls them; the code is the authority.
The term was coined by cryptographer Nick Szabo in the 1990s, but practical implementation at scale required Ethereum’s Turing-complete blockchain (2015).
Core Properties
| Property | Implication |
|---|---|
| Immutable | Code cannot be changed after deployment; bugs are permanent (see DAO hack) |
| Deterministic | Same inputs always produce same outputs across all nodes |
| Trustless | No intermediary needed; the code enforces the agreement |
| Transparent | Source code typically published on block explorers; anyone can verify |
| Composable | Contracts can call other contracts, enabling complex financial protocols built from building blocks |
How They Work on Ethereum
Smart contracts are written in Solidity (C/JavaScript-like) or Vyper (Python-like), compiled to EVM bytecode, and deployed to the Ethereum blockchain. Once deployed:
- The contract has a permanent address on the blockchain
- Anyone can send transactions to it (triggering its code)
- It can hold ETH and tokens
- It can call other contracts
- It cannot be stopped or modified by anyone — including its creator
Every execution costs gas (paid in ETH) — proportional to the computational complexity of the operation.
Key Applications
DeFi (Decentralised Finance)
Lending, borrowing, trading, and yield farming without banks. A lending protocol smart contract automatically manages collateral, liquidations, and interest. See defi.
Token Issuance
ERC-20 and ERC-721 tokens are smart contracts. Creating a new token means deploying a contract that tracks balances and transfers. See ethereum-token-standards.
Stablecoins
Algorithmic and crypto-backed stablecoins (DAI, FRAX) are maintained by smart contract logic — automatically adjusting supply and collateral ratios to hold the peg.
NFTs
Ownership of unique digital assets is tracked in ERC-721 smart contracts — permanent, publicly verifiable, not dependent on any company’s database. See nft.
DAOs (Decentralised Autonomous Organisations)
Governance structures where token holders vote on proposals; decisions automatically execute via smart contracts, bypassing traditional corporate governance.
Risks and Limitations
Immutability as Risk
A bug in a deployed contract cannot be fixed — it must be migrated to a new contract. The 2016 DAO hack exploited a re-entrancy bug and drained $50M in ETH. Because the code was immutable, the only remedy was a controversial hard fork that split Ethereum into ETH and ETC.
Oracle Problem
Smart contracts are isolated from external data. If a contract needs off-chain data (price of gold, weather, sports results), it must rely on an oracle — an external data feed. Oracle manipulation is a common attack vector.
Gas Limits
Complex contracts can fail mid-execution if they run out of gas, reverting the transaction (but still charging gas for what was used).
Sources: wikipedia-2026-ethereum | ethereumorg-2026-what-is-ethereum | prasad-2021-five-myths-cryptocurrency