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Smart Contracts

3 min read

If consensus is what keeps the blockchain honest, smart contracts are what make it actually useful for more than just sending money around.

What is a Smart Contract?

Think of your friend group again. You and Aman make a bet: “If India wins the match tomorrow, you pay me ₹500. If they lose, I pay you ₹500.”

The problem with bets between friends — someone might not pay up. You need to trust each other. Or… you both hand ₹500 to Priya and say: “Hold this. After the match, give ₹1000 to whoever won.” Priya is the trusted middleman.

A smart contract is like Priya, except it’s code running on the blockchain. It holds the money and releases it automatically based on conditions. No trust needed, no middleman who might run off with the cash.

sequenceDiagram
    participant You
    participant Aman
    participant Smart Contract
    participant Result

    You->>Smart Contract: Deposit â‚ą500
    Aman->>Smart Contract: Deposit â‚ą500
    Result->>Smart Contract: India wins! 🏏
    Smart Contract->>You: Sends â‚ą1000 automatically
    Note over Smart Contract: No one can change the rules<br/>once the contract is deployed

In real terms: A smart contract is code deployed to the blockchain that executes automatically when conditions are met. Once deployed, nobody can change it — not even the person who wrote it. It’s written in languages like Solidity (for Ethereum).

How It Works

Think of a smart contract like a vending machine:

  1. You put in money (send crypto to the contract address)
  2. You select what you want (call a function on the contract)
  3. The machine gives you exactly what it’s programmed to (code executes)

No human involved. No “the shopkeeper decided not to give you your chips.” The machine runs the same way every single time.

flowchart LR
    A["Input:<br/>Conditions met?"] --> B{"Smart Contract<br/>checks conditions"}
    B -->|"Yes âś“"| C["Execute automatically<br/>(send money, transfer<br/>ownership, etc.)"]
    B -->|"No âś—"| D["Do nothing.<br/>Wait for conditions."]

Why Immutability is Both Amazing and Scary

The fact that nobody can change a smart contract is the whole point — it means nobody can cheat. But it also means if there’s a bug, it’s there forever. You can’t patch it, you can’t hotfix it.

In 2016, a smart contract called “The DAO” had a bug that let someone drain $60 million. The code was “working as written” — it just wasn’t written correctly. This is why smart contract auditing is an entire industry now. You NEED to get the code right before deploying, because there’s no undo button.

The Big Limitation

Here’s the thing — our bet contract needs to know whether India won. But a smart contract can only see what’s on its own blockchain. It has zero knowledge of cricket scores, stock prices, weather, or anything else happening off-chain (outside the blockchain).

It’s like being locked in a room with no windows. You can run any logic you want, but you have no idea what’s happening outside.

This is called the oracle problem, and it’s why we need oracles — the bridge between the real world and the blockchain.

Real-World Use Cases

Smart contracts aren’t just for bets. They power:

  • DeFi — lending, borrowing, trading without banks (see liquidity-pools, automated-market-makers)
  • NFTs — ownership records on-chain
  • Insurance — automatic payouts when conditions are met (crop insurance, flight delays)
  • DAOs — organizations governed by code and community votes
  • Supply chain — tracking goods from factory to store with automated payments at each step

Basically anything where “if X happens, do Y” and you don’t want to trust a middleman to be honest about it.

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