The term smart contracts is an often used buzzword within the crypto space. Probably most of crypto investors are well aware that smart contracts exist but a lot of people would not be able to explain what they are.
Smart contracts are programs stored on a blockchain that run when predetermined conditions are met. Mostly, they automate the execution of an agreement when certain parameters are met. This helps to give all participants the certainty of what the outcome will look like. All this happens without any intermediaries or congestion.
How do Smart Contracts work?
Smart contracts use simple 'if/when/then' statements that are implement within a project's code. When the appointed terms of a pre-fixed event are met a network of computers executes the smart contracts.
When the transaction which was initiated by the smart contract is all set and done the blockchain gets updated. Transactions written on the ledger of a blockchain can not be changed.
There are already templates, web interfaces and other tools available to simplify the implementation of smart contracts within code. Nevertheless, smart contracts are often developed by programmers.
Benefits of Smart Contracts
- Speed, efficiency and accuracy
- Trust and transparency
Risks by Smart Contracts
Since a lot of projects within the crypto space use the tools offered by smart contracts there is always the potential of malicious intend. Before you approve a wallet to interact with a smart contract you should always make sure there is no malicious code inserted within the smart contract. While this may be easy for users that have a certain knowledge of programming it can be a hard task for people without any experience.
An example for a malicious smart contract is the case of 'Squid Coin'. This was a project were all buyers were not allowed to sell their investment. The project ended in a terrible rug.
Thus we recommend to only interact with smart contracts that were already audited. This is a crucial part of your risk management. There are several projects that provide audits for other projects which are well respected within the community. Always make sure that the project has an up-to-date audit every time the code gets an update.