Smart contracts

Smart contracts are program code that is implemented and executed on a blockchain. 

Smart contracts can perform a variety of tasks, from selling common tokens or conducting NFT auctions to providing various information or managing entire projects.

There are a huge number of smart contracts. Here are the most common ones:

1) Any token created on the blockchain platform is a smart contract. 

This contract defines the logic of the token (different fees or sending only from certain addresses), the number of given tokens, its name, and the standard (ERC-20, ERC-721, ERC-1155).

In addition, this code can enable to create new tokens or burn old ones. All this is a set of rules fixed in the program code, according to which this token will function in the future.

2) DEX. A decentralized exchange where you can exchange one token for another. Different variants of DEX may involve creating a unique pool for two tokens or one with the possibility of duplication (and potentially even creating not just pairs, but entire pools of tokens), setting commissions, defining mathematical curves that determine price changes. Unlike a CEX (centralized exchange), all program code in smart contracts is open (here we can go deeper and discuss verified code, but we will omit it for simplicity’s sake), which makes its work open for users and more honest.

3) Lending - protocols, thanks to which you can make loans or earn some interest from lending your tokens.

There are much fewer possible varieties here, due to the complexity of these systems.

4) A large number of varieties and all possible types of protocols: staking, vesting, liquid staking, oracle, auction, otc-market, DAO, smart-router, etc.

What are smart contracts for?

Decentralization: Smart contracts eliminate the need for centralized intermediaries (e.g., banks or legal authorities) to enter into and execute agreements. This allows for decentralized applications where the smart contract code is the law.

Automation: Smart contracts are automatically executed when certain conditions occur. This avoids the need to trust a third party to fulfill an agreement. For example, a contract can automatically transfer funds once certain conditions are met.

Transparency: All events related to the execution of a smart contract are recorded on the blockchain and become part of a publicly available distributed ledger. This ensures transparency and verifiability for all participants in the network.

Security: Smart contracts are protected by cryptographic methods. This increases security as they are protected from many types of attacks that can target centralized systems.

Cost reduction: The use of smart contracts can reduce costs associated with intermediaries, paperwork and the time required to execute agreements.

Knowing how smart contracts work will help you not to lose (and possibly even earn) money. Since every blockchain has a lot of peculiarities, being aware of them can make your life a lot easier, for example, help you understand token balances. Let's say you know that Ethereum doesn't allow you to send funds from a zero address, then you won't have any questions about why some address holds a couple hundred million dollars worth of funds or why it is used as a trash can.

It is very important to understand how smart contracts work if you intend to be a long-term investor. This knowledge will help you understand the projects from the inside and conduct your own protocol analyses.