A smart contract is a self-executing, decentralized protocol stored on a blockchain that automatically enforces the terms of an agreement between parties.
Because it is decentralized, no single entity controls the contract, and it operates without intermediaries, relying on a network of distributed nodes to validate and execute transactions.
Smart contracts offer:
Decentralized execution: Smart contracts run on decentralized blockchains rather than centralized servers, allowing multiple parties to achieve a shared outcome in a secure, tamper-proof, and timely manner.
Automation without intermediaries: Smart contracts eliminate the need for central authorities or trusted intermediaries (e.g., banks) by automating transactions directly between parties.
Efficiency and cost reduction: By automating agreements and processes, smart contracts reduce counterparty risk, improve efficiency, and lower operational costs.
Transparency and security: Smart contracts provide a high level of transparency and are resistant to manipulation, as they are executed on public, decentralized blockchains.
Versatility: They enable a wide range of decentralized applications (dApps), from creating tokens (fungible and non-fungible) to automating complex agreements and exchanges.
Borderless accessibility: Smart contracts, especially on platforms like Ethereum, are accessible globally and can facilitate secure, automated transactions regardless of geographical borders.
How does a smart contract work?
Creating and deploying smart contracts generally follows a clear, step-by-step process:
Code creation: Developers transform business goals into contract logic using a blockchain-specific programming language like Solidity (Ethereum) or Rust (Solana).
Deployment: The contract is deployed to the blockchain network, where nodes maintain a copy of the smart contract code and data.
Trigger conditions: The contract remains inactive until users interact with it, or predefined conditions are met (e.g., a specific event like emitting a Transfer event after a token transfer, or when a transaction is executed).
Execution: Once the conditions are met, the contract initiates execution and nodes process and validate the transactions. The contract then automatically executes its programmed actions, and gas fees are charged for computation.
State change: The contract updates the blockchain's state, recording the outcome of all transactions and changes. A record of these are stored in a state root hash (typically included in the block header) then validated and stored by nodes across the network.
Note: Gas fees are transaction costs paid to process and validate operations on blockchain networks. Think of them like paying for the computational power needed to run your smart contract - similar to how you pay for gas to run your car. These fees help compensate the network operators who validate transactions.
What kinds of smart contracts are there?
There are different types of smart contracts designed for specific purposes, each with its own set of best practices, common patterns, and potential security considerations. While the classification isn't always strict, common types of smart contracts include:
Token contracts represent various types of assets or values:
USDT is a fungible ERC-20 token on Ethereum that also exists as a TRC-20 token on the Tron blockchain.
Filecoin is a decentralized storage network built on IPFS (InterPlanetary File System) where users pay for storage on a peer-to-peer system.
Oracle contracts connect off-chain data with on-chain contracts:
Chainlinkprovides off-chain data to blockchain applications, enabling smart contracts to securely interact with real-world data such as price feeds, weather data, and more. It operates across multiple blockchain ecosystems and is widely used for DeFi, gaming, and other decentralized applications.
ZK Rollup is a Layer 2 scaling solution for Ethereum using zero-knowledge proofs to bundle multiple transactions into a single proof, reducing the computational burden on the main chain and increasing transaction throughput.
Proxy contractsallow upgrades to the logic of smart contracts post-deployment:
OpenZeppelin is a well-known open-source library that provides a collection of reusable smart contract components, including proxy contracts.
Common smart contract languages
Many blockchain platforms have developed their own smart contract languages with unique features and trade-offs, depending on factors like performance, developer experience, and the level of security required. The choice of language often aligns with the specific goals of a project or ecosystem. Notable examples include:
Solidity: The most widely used smart contract language, originally created for Ethereum. It is known for its simplicity, strong developer community, and wide adoption. It’s also used on other EVM-compatible blockchains like Binance Smart Chain and TRON.
Rust: Solana uses Rust for its smart contracts, promoting strong memory safety features that make it an appealing choice for developers focused on security.
Vyper: An alternative to Solidity for building on Ethereum. It’s designed to improve security by simplifying the language to reduce the risk of common vulnerabilities.
Plutus: A smart contract language based on Haskell, emphasizing formal verification. Plutus allows for mathematically verifiable code, ensuring high reliability. Cardano is built with Plutus.
Substrate: Substrate is a framework that allows developers to write custom smart contracts for Polkadot’s parachain system. Substrate is flexible and allows developers to write contracts in various languages like Rust and ink!.
Cairo: a Rust-inspired language used in StarkNet, an L2 blockchain, Cairo allows developers to write scalable contracts without needing a deep understanding of the underlying ZK concepts.
Noir: A Domain Specific Language (DSL) designed for privacy-focused smart contracts, Noir supports zero-knowledge proofs for private transactions and computations.
Smart contract security
Smart contracts are immutable by design. Thus, developing well defined, thorough smart contract security frameworks are crucial to preventing exploits and bugs. Key considerations include:
Access control: Implement ownership or role-based permissions to restrict access to critical functions.
Testing & audits: Test and audit smart contract code pre-deployment to identify and mitigate vulnerabilities.
Common threats: Defend against reentrancy attacks, under/overflows, and oracle manipulation by following best practices like using SafeMath libraries and multiple trusted oracles.
Use the latest compiler version: Always ensure the most up-to-date compiler is used to avoid known vulnerabilities.
Keep contracts simple and modular: Simplifying contracts and eliminating redundant code reduces the risk of introducing bugs and improves maintainability.
Use formal verification techniques: When possible, employ mathematical methods to prove the correctness of the contract’s logic and prevent unforeseen errors.
