A Smart Contract is an automated agreement with its conditions encoded directly and implemented on the blockchain. It automatically upholds agreements among parties, improving transparency and minimizing the necessity for intermediaries. Smart contracts drive DeFi, NFT exchanges, and numerous decentralized applications.
Many DApps are built on top of Smart Contracts and there are a variety of critical use cases within the Web3 ecosystem which are powered by Smart Contracts. For example, in DeFi (Decentralized Finance), makes it possible to lend, borrow, and trade, by automating complex financial processes (collateral management, liquidity pool operations, etc.). These automated processes cut operational costs and risks to a minimum while offering users real-time access to financial services with minimal effort.
Smart Contracts in NFT exchanges are used to create (mint), transfer, and own unique digital assets. They also make sure creators get paid royalties on secondary sales, which means that the revenue streams for artists and developers continue. The automation of this reduces manual intervention and builds confidence in the marketplace.
Meanwhile, Smart Contracts also power a type of organizational structure called DAO (Decentralized Autonomous Organization), which makes Governance processes automated, including proposal voting and fund allocation. This makes the decision-making process transparent and democratic, concurrently removing the chance of human error or manipulation.
They are written in programming languages like Solidity (analogous to Vyper for Ethereum and companion networks) or Vyper and are rigorously tested to guarantee security and maximum performance. After deployment, they operate on their own, executing instructions only when certain conditions are met (for example receiving certain inputs or time).