Smart contracts are a core part of Web3, enabling blockchains like Ethereum to do far more than just send and receive funds.
A smart contract is a self-executing program stored on a blockchain that automatically runs when specific conditions are met.
In 1994, Nick Szabo had the idea to create digital agreements that run automatically without middlemen. With the launch of Ethereum in 2015, smart contracts became a reality, enabling decentralized applications (dApps), token creation, and advanced blockchain operations that now form the Web3 ecosystem.
To set up a smart contract, developers write its rules and conditions using programming languages like Solidity (used on Ethereum). These rules define what the contract will do, such as exchanging tokens or processing payments.
Once the smart contract is deployed to the blockchain, it becomes immutable, meaning it cannot be changed, ensuring security and trust for anyone interacting with it.
Users interact with smart contracts by sending transactions to trigger specific actions. For example, on a decentralized exchange (DEX) like Uniswap, a smart contract automates the process of swapping tokens.
If a user wants to swap ETH for an ERC-20 token like USDC, the smart contract checks the user’s approval to access their tokens, calculates the exchange rate from a shared liquidity pool, and completes the swap by sending the correct amount of USDC to the user’s wallet.
Token approvals are most likely the first type of smart contract you will encounter. They allow a smart contract to access and spend a specific amount of a user’s tokens on their behalf.
When interacting with decentralized applications (dApps), users must sign a token approval transaction so the contract can perform actions like token swaps.
To stay safe, users should review token approval amounts carefully and only interact with trusted smart contracts. It’s also a good practice to regularly check your token approvals and remove all the approvals you don’t need on a regular basis.
If you’re considering interacting with a smart contract, you should check and see if it has been audited. Often, projects will have third parties audit their smart contracts to prove that they aren’t malicious. As it always pays off to be careful when using Web3, you should always check if the smart contract has been audited before signing it.
An example of a smart contract is selling an NFT (Non-Fungible Token), like digital art, on a platform such as OpenSea.
The smart contract ensures the transaction happens securely and automatically: it verifies that the buyer has enough funds, locks those funds, and transfers ownership of the NFT to the buyer. Once the transfer is complete, the smart contract releases the payment to the seller.
Many blockchains support smart contracts, including: