Crypto glossary

Smart Contract

A smart contract is a program that runs on a blockchain and automatically executes its defined rules when the conditions are met. Once deployed, it runs exactly as written, without a company operating it.

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How smart contracts work

A developer writes code, for Ethereum usually in a language called Solidity, and deploys it to the blockchain, where it gets its own address. Anyone can then call its functions by sending a transaction. Every node runs the same code and agrees on the result, so the outcome does not depend on trusting a single server.

A simple example is a contract that holds funds and releases them only when two of three named parties approve. More complex contracts run entire exchanges or lending markets. Despite the name, a smart contract is not necessarily a legal contract; it is software.

What they make possible

Smart contracts are the foundation of tokens such as ERC-20 tokens and NFTs, stablecoins, decentralized exchanges, lending protocols and DAOs. The term was coined by computer scientist Nick Szabo in the 1990s, and Ethereum, launched in 2015, made general-purpose smart contracts widely available. Many other blockchains support them today.

Limits

A contract can only see data on its own blockchain. To react to real-world information, such as an asset price, it needs an oracle, an external data feed, which adds its own trust and manipulation risks. Running a contract costs fees, called gas, and complex operations cost more.

Risks

Code is law cuts both ways: if there is a bug, the contract executes the bug. In 2016 an attacker exploited a flaw in The DAO, an early Ethereum investment contract, and drained a large share of its ETH, which led to a contested hard fork of Ethereum. Since then, exploits of DeFi contracts and cross-chain bridges have caused large losses. Audits reduce but do not eliminate risk. Many contracts are also upgradeable or have admin keys, meaning a team can change the rules or freeze funds, which is a trust assumption users should check.

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Frequently asked questions

Can a smart contract be changed?

A plain contract cannot, but many projects use upgradeable designs or admin functions that let a team modify behavior. Whether that is possible should be checked for each contract.

Are smart contracts legally binding?

Not automatically. They are programs; whether an agreement executed through one is legally enforceable depends on the jurisdiction and circumstances.

Does an audit make a smart contract safe?

No. An audit lowers the chance of known types of bugs, but audited protocols have still been exploited.

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All glossary terms · Educational reference only — not investment, legal, tax or financial advice.