Key Takeaways:

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• Automated Agreement – A smart contract is a digital agreement on a blockchain network that is executed automatically upon fulfilling some terms and conditions.
• Beyond Blockchain – Unlike Bitcoin, which has limited automation, smart contracts enable complex applications like DeFi and NFTs on platforms like Ethereum.
• Challenges & Future – Security risks, immutability, and reliance on oracles exist, but innovations like cross-chain functionality and legal adoption will drive growth.

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Smart contracts are revolutionizing how agreements and transactions occur in the digital world. But what exactly makes smart contracts such a critical innovation in blockchain technology?

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What is a smart contract?

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Put simply, a smart contract is a digital agreement on a blockchain network that is executed automatically upon fulfilling some terms and conditions.

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Smart contracts operate using simple logic: predefined "if/when… then…" rules embedded directly into blockchain code. When specific conditions are met, these contracts execute actions automatically, such as releasing funds, registering ownership, or initiating other transactions.

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This eliminates intermediaries which in turn boosts efficiency, increases transparency, and builds trust among parties who may not directly know each other.

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How do smart contracts work?

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Below is a simplified example of a smart contract written in Solidity, the most common language used for Ethereum smart contracts. This example shows an escrow arrangement. Funds from the buyer are locked in the smart contract, released to the seller only after the buyer confirms the delivery of goods:

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// SPDX-License-Identifier: MIT
pragma solidity ^0.8.0;

contract SimpleEscrow {
    address public buyer;
    address payable public seller;
    uint public amount;
    bool public isDelivered;

    constructor(address payable _seller) payable {
        buyer = msg.sender;
        seller = payable(_seller);
        amount = msg.value;
        delivered = false;
    }

    address payable public seller;
    address public buyer;
    uint public amount;
    bool public delivered;

    modifier onlyBuyer() {
        require(msg.sender == buyer, \"Only buyer can confirm delivery.\");
        _;
    }

    // Buyer confirms that the product has been delivered
    function confirmDelivery() public onlyBuyer {
        delivered = true;
        seller.transfer(amount);
    }

    // Seller marks item as delivered
    function markDelivered() public {
        require(msg.sender == seller, \"Only seller can mark as delivered.\");
        delivered = true;
    }

    // Buyer confirms delivery and releases funds
    function confirmDelivery() public onlyBuyer {
        require(delivered, \"Goods have not been marked as delivered.\");
        seller.transfer(amount);
    }
}

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Examples of smart contracts

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Smart contracts are transforming industries such as decentralized finance (DeFi), digital asset marketplaces, and supply chain management. In DeFi, they automate lending and borrowing processes, while NFT marketplaces rely on them to handle digital asset ownership and royalties seamlessly. Supply chains utilize smart contracts to automatically verify products at checkpoints, instantly triggering payments when criteria are met.

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Is Bitcoin a smart contract?

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Bitcoin itself is not technically a smart contract. While Bitcoin employs basic scripting for simple automated functions—like multisignature wallets or timed transactions—it lacks the advanced programmable capabilities of dedicated smart contract platforms like Ethereum, which support complex decentralized applications.

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Here's an example of the script that locks the funds to a Bitcoin address and ensures that only the rightful owner (who has the private key) can spend them.

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OP_DUP OP_HASH160 <Public Key Hash> OP_EQUALVERIFY OP_CHECKSIG

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While here's the script to that provides the necessary proof (signature and public key) to satisfy the locking script and spend the Bitcoin.

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OP_DUP OP_HASH160 <Public Key Hash> OP_EQUALVERIFY OP_CHECKSIG

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What's the difference between smart contracts and blockchain?

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Here's the short answer: Blockchain is the foundational infrastructure - while smart contracts operating as applications on top.

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Blockchain is a decentralized, secure ledger that records transactions transparently across multiple computers. Smart contracts, meanwhile, are specialized applications built upon blockchain technology that automatically execute predefined agreements. Blockchain provides the secure infrastructure, while smart contracts harness this framework to perform autonomous digital agreements.

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Each blockchain handles smart contracts slightly differently. Here's a quick list of blockchains and some key details about each of their smart contract capabilities.

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Are smart contracts legal?

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The legality of smart contracts varies by jurisdiction, but many countries increasingly recognize their enforceability under existing legal frameworks, provided traditional contract criteria are met. However, legal recognition continues to evolve, creating some uncertainty regarding enforceability, especially across international borders.

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Why smart contracts are popular: Aave example

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Smart contracts have become popular due to innovative use cases exemplified by platforms like Aave. These innovations include groundbreaking flash loans for instant collateral-free borrowing, decentralized governance allowing community participation, seamless cross-chain interoperability, and ongoing innovation driven by a dynamic community.

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The contract below demonstrates the basic implementation of a Flash Loan using Aave's protocol.

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// SPDX-License-Identifier: MIT
pragma solidity ^0.8.10;

import "@aave/core-v3/contracts/interfaces/IPool.sol";
import "@aave/core-v3/contracts/flashloan/base/FlashLoanSimpleReceiverBase.sol";
import "@openzeppelin/contracts/token/ERC20/IERC20.sol";

contract SimpleFlashLoan is FlashLoanSimpleReceiverBase {

    constructor(address _poolAddressesProvider)
        FlashLoanSimpleReceiverBase(IPoolAddressesProvider(_poolAddressesProvider))
    {}

    /// Request a simple flash loan
    function requestFlashLoan(address token, uint256 amount) external {
        // Initiate flash loan request from Aave pool
        POOL.flashLoanSimple(
            address(this), 
            token, 
            amount, 
            "",      // additional data
            0        // referral code
        );
    }

    /// Callback function invoked by Aave after sending flash loan funds
    function executeOperation(
        address asset,
        uint256 amount,
        uint256 premium,    // flash loan fee
     

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Challenges and limitations of smart contracts

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Despite their potential, smart contracts face some hurdles. Coding vulnerabilities can lead to serious security breaches, while the immutability of blockchain makes correcting mistakes challenging after deployment. Additionally, smart contracts depend on external oracles for real-world data, introducing potential vulnerabilities.

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In February 2025, zkLend, a decentralized finance (DeFi) protocol built on Starknet, experienced a significant exploit, resulting in a loss of approximately $9.57 million. Attackers leveraged a vulnerability related to decimal precision within the platform’s smart contracts, manipulating balances to siphon funds. This incident underscores the critical necessity for comprehensive testing and rigorous security audits in smart contract development.

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The future of smart contracts

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Smart contracts continue to evolve rapidly. Innovations such as cross-chain functionality, improved privacy through zero-knowledge proofs, and clearer integration with existing legal frameworks will greatly expand their potential uses and adoption across sectors.

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Final thoughts

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Smart contracts represent a transformative innovation in blockchain technology, promising greater efficiency, reduced costs, and enhanced transparency across industries. While challenges exist, their potential to reshape multiple sectors remains immense. Staying informed about smart contracts will be essential for thriving in the digital economy of tomorrow.

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