Have you ever heard of a “Smart Contract” and wondered what it was? In this post, I will try to give you some very simple ways to understand what a Smart Contract is and why it is important to crypto.
What is a Smart Contract?
A smart contract is nothing more than an automated set of rules that are executed when certain conditions are met.
That is it. Nothing more. The Smart Contract has a function, and the function of the Smart Contract is to create trust between parties that don’t know each other. It achieves this by being transparent, immutable and impossible to hack, steal or alter as it sits in public view on the blockchain.
Smart Contracts are the new shiny object in governance tools and they are also the backbone of the blockchain.
Confusion of what Smart Contracts do often comes from trying to understand all the different functions a Smart Contract might have and getting lost in the terminology. Remember, understanding the function of a Smart Contract is as simple as knowing what a traditional contract does.
A comparison between a traditional contract and a Smart Contract
Everyone at some point has seen a credit card terms of service. This contract lets you understand the interest that is going to be charged, your payment schedule, late fees, etc. The contract itself may be filled with lots of confusing legal language, but the function is clear. It governs the terms of your credit card.
A Smart Contract is no different. It governs the rules of the digital item such as token supply, inflation, transfer, royalties, etc.
While the function of both are clear, there are some significant differences on how they are governed, written, and executed.
| Smart Contract | Traditional Contract | |
| Language | Code | Legal words and terms |
| Execution | Automatic based on conditions met on the blockchain and interaction with contract | Manuel by parties accepting and agreeing to terms |
| Governance | Blockchain code that executes automatically when conditions are met | Teams of people (exp. lawyers) or software that monitors for conditions in the contract |
| Visibility | Public | Public/Private |
| Access | Everyone | Mixed from everyone to a single person depending on the contract and service |
| Enforcement | Code enforced | Legally enforced |
Smart Contracts are designed to be understood by anyone reading the contract, fully automated to remove human interaction, and irrevocable. If a credit card company were to use a credit card Smart Contract, things like interest, payment penalties, credit approval, etc. would all be automated and contained within the blockchain.
Understand How a Smart Contract Works
We have defined the basic function of a Smart Contract and the difference it has between a traditional contract, but we have not explained how it achieves those differences.
How a Smart Contact actually achieves things like automation, security, and public view often adds to the confusion as traditional contracts do not incorporate these things and depend on custom built systems or human staff to execute the terms.
A smart contract blends the line between contracts we all know and software solutions. Software is simply code that returns results based on some action or condition met. Sound familiar?
Since a smart contract is a self-executing digital contract that runs on a blockchain, any interaction with the smart contract creates a record on the blockchain that can not be changed or modified. It is this action that allows various conditions to be met, like trading an NFT, a air drop, or some other action attached to the smart contract..
It’s also for this reason that Smart Contracts are so critical to understand. Since it is just a code base of actions that take place when conditions are met, this opens the door for a large amount of risk and exploitation. A poorly written smart contract can open the project up for risk, cause investors to lose assets, or it can steal assets from unsuspecting victims.
How To Find A Smart Contract
Now that you know that a Smart Contract is a an executable code that processes transactions and other items, it is important to be able to find and audit the Smart Contract before you interact with it.
Fortunately there are many ways to find the Smart Contract and read what is in it. There is one primary piece of information that you need to do this.
Any project you interact with will have a Smart Contract and that contract will have its own unique address. It will look something like this:
Contract: 0x4d224452801ACEd8B2F0aebE155379bb5D594381
Once you have the contract address you can go to Etherscan to look up the smart contract and view its contents.
Using Etherscan to Lookup a Smart Contract
What is Etherscan?
Etherscan is a great free tool to look up information on ETH transactions. It is a true bock explorer on the Ethereum network which gives you visibility of all the interaction between transactions on the network.
The tool is free for most information you would like to look at. It does have pay versions for more advanced features, but most of the free tools will suffice for the average user.
Finding Smart Contracts on Etherscan
There are several ways to find Smart Contracts on Etherscan.
The first way to search, if you are interacting with a token or an address that you have been given, you simply search for that address in the search bar and in the address profile you will see the smart contract address.
Smart Contract Search Example
Let’s search for the $APECOIN. Simply type in Apecoin in the search and it should show a dropdown with several options. Click on the Apecoin and you will be shown all the token information.
Etherscan Homepage Search Bar:
Search Result for Apecoin
In the profile summary you will see Contract. Simply click on that link and you will be taken to the Smart Contract page.
Now you can see all transactions with this contract and in the menu bar above the transactions you will see all kinds of options, one of which is Contract. Click on contract and you will be presented the actual contract.
That is it, now you can read the Smart Contract that governs $APECOIN.
The second way to look up a smart contract on Etherscan is simply to go to the “More” menu option on the home page and look for Smart Contract Search. Click on the link and enter your address or keyword to find the Smart Contract.
How The Smart Contract Information Helps You
The Smart Contract is the source code for the project, token, or other application you are interacting with. Knowing certain information helps you in the following ways:
- It helps confirm that you are interacting with the right address before you commit to a transaction
- Having access to the contract helps you understand the actual terms you are agreeing to
- Knowing all the interactions with the Smart Contract can help you identify red flags
- You can follow the funds within that Smart Contract
- Any many more important information
Knowing the details about who, what, and why will help protect you from fraud and bad investments. You should always review the Smart Contract information before you commit to anything!
Smart Contracts are really the next evolutionary step in business processes. They integrate a business process (buying a ticket) with a transaction record.
While that may sound simple enough, most traditional businesses have separate systems that pass information from system to system (purchase ticket on website, create ticket on ticketing system, pass information to billing system, respond to customer through email system, etc.).
In the new world of Smart Contracts, many of these systems can be eliminated and recorded through a Smart Contract in a simplified and clean manner.
The future will bring even more and exciting ways to use Smart Contracts once they become well understood. Learning about them now will help you get ahead of the curve and not be surprised when they show up.
