What Are Smart Contracts In Cryptocurrency? A Beginner’s Guide

Similar to the traditional contract, a smart contract establishes the terms of an agreement. Smart contracts in cryptocurrency are executed as running codes on a blockchain like Ethereum. Primarily, smart contracts enable developers to build apps that could access the blockchain security and reliability framework while more advanced peer-to-peer functionality is being offered.

Smart contracts are considered “smart” because of the establishment and execution as the code is running on a blockchain, rather than lying pretty on a lawyer’s desk. Smart contracts were buttressed from the stemming idea behind Bitcoin, which is the money transaction without a “trusted intermediary” like a bank as the middleman.

This operation is securely automated with virtual decentralization of any transaction, regardless of how complex it is. With the running of this code on a blockchain like Ethereum, security, reliability, and unlimited accessibility are enabled.

Why Are Smart Contracts Important?

Building a wide range of decentralized apps (dApps) and tokens are allowed by smart contracts. From logistics and game experiences to new financial tools, smart contracts are very important as these features are stored on a blockchain network like any crypto transaction.

However, there is no general reversal or change that can be made when a smart contract app is added to the blockchain. Decentralized apps (dApps) are smart contract-powered apps that are inclusive of decentralized finance (DeFi). The DeFi apps enable crypto holders to operate in complex financial transactions(savings, loans, insurance) without the meddlesome of a bank or any financial institution.

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Some of the trendy smart contract-powered apps include:

1. Uniswap: this is a decentralized exchange that enables users with the smart contract to effectively trade-specific cryptocurrencies without exchange rates being set by any central authority.

2. USDC: this is the cryptocurrency being pegged with the smart contract to the US dollar, hence putting 1 USDC to an equivalent of $1.

3. Compound: this is a platform that enables investors to earn and borrowers access instant loans with the use of smart contracts.

Traditional finance is characterized by currency exchange, which is expensive, and time traditional finance, swapping currencies is expensive and time-consuming. Also, it is neither easy nor secure for people to loan out their assets to strangers from anywhere in the world, but the advent and use of smart contracts have changed both narratives, such that transactions are enabled from any part of the world.

How Do Smart Contracts Work?

Smart contracts were first proposed sometime in the 1990s by a computer scientist and lawyer, Nick Szabo, where Szabo famously took the comparison of a smart contract with a vending machine.

Today, Ethereum is the most popular smart contract platform in the crypto space. As simple as it is, anyone can create and deploy a smart contract to a blockchain. This is because their code is publicly verifiable, and as such, any interested party can see the exact logic a smart contract follows when digital assets are received.

1. Smart contracts are written in different programming languages, such as Web Assembly and Michelson. The respective smart contract’s code is stored on the Ethereum blockchain network, thereby allowing inspection by any interested party.

2. Every computer on the network has the function of storing a copy of all existing smart contracts with their transaction data.

3. Code is executed by all nodes of a network when funds are received by the smart contract to ensure a consensus is reached about the resulting flow of value. This functionality enables smart contracts to securely run without the interference of any central authority.

4. A fee called “gas” needs to be paid before a smart contract can be executed on the Ethereum network.

5. Smart contracts can not be altered, even by their creator when deployment onto a blockchain has been done. This is designed to remove an event of censorship or shut down.


Smart contract in cryptocurrency is a function of digital advancement while fulfilling the ideals of the creation of cryptocurrency like Bitcoin as a decentralized digital currency. However, much needs to be done for the adoption of smart contract technology by other cryptocurrencies in the world.

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