What is a Smart Contract in Crypto?

Smart contracts are integral to blockchain technology, enabling automated functions without intermediaries. For developers, they provide the necessary toolset to create blockchain apps such as web3 games, defi platforms, NFTs and much much more.

If you want to launch any kind of web3 app or game, you'll need to consider smart contract development. But before we get there, let's dive into what smart contracts are, how they work, and their key role in blockchain app development.

What is a Smart Contract?

A smart contract is a self-executing program deployed on a blockchain. While most computer programs operate on one machine, smart contracts operate on a virtual machine maintained by multiple participants on a blockchain network. For EVM chains, they rely on the Ethereum Virtual Machine (EVM) for their smart contracts to function.

A smart contract operates on an if/then basis, executing specific actions when predefined conditions are met. For example, in a payment agreement, a smart contract might release funds to a freelancer after work is marked as complete.

When the contract is written and deployed, its conditions are set. The smart contract can then execute functions without needing oversight when participants on the network interact with it via certain “calls”.

What is a Smart Contract Call?

A smart contract call is an interaction between a user or another program and the smart contract itself. Calls can retrieve data (read operations) or execute a function (write operations) within the contract.

For example, when a player claims an in-game reward in a blockchain game, a smart contract call processes the logic, verifies the conditions, and triggers the reward distribution.

The History of Smart Contracts

The concept of smart contracts was first proposed by Nick Szabo in the 1990s, long before cryptocurrency was a reality. But even then, he envisioned self-executing agreements powered by computer code.

This vision became a reality with the launch of Ethereum in 2015, introducing the Ethereum Virtual Machine and enabling developers to write programmable contracts.

The early 'Greeter Contract' was one of the first smart contracts on Ethereum: it simply returned a greeting string. But this simple piece of code paved the way for more complex applications.

Over time, smart contracts evolved to power DeFi platforms like Aave, revolutionizing finance; NFTs, starting with CryptoKitties in 2017, transforming digital ownership; and DAOs, automating decentralized governance. Today, smart contracts underpin a wide range of blockchain innovations across industries.

To learn more, check out our article on the history of smart contracts!

What Can Smart Contracts Be Used For?

Smart contracts have diverse applications, but are pretty much integral for operating decentralized apps (dApps). Let's take a look at the kind of things smart contracts are used for:

Enabling web3 games

In blockchain gaming, smart contracts are used to manage tokenized assets. Fungible token smart contracts unlock web3 gaming essentials like in-game currencies; whereas NFT smart contracts introduce tradable characters and items.

But there are so many smart contracts for web3 game development that cover all sorts of functionality. For example, a play-to-earn game might use a smart contract to automatically reward players with cryptocurrency based on their achievements. Or a pet raising game might introduce a breeding function using NFT smart contracts. The possibilities are endless!

Facilitating NFTs and NFT Marketplaces

NFT marketplaces and collections heavily rely on smart contracts for ownership verification and transactions. A smart contract governs the creation (or "minting") of NFTs, ensures uniqueness, and facilitates secondary sales. Some NFT smart contracts also guarantee royalties for creators, which has contributed greatly to the creator economy!

NFT marketplaces also rely on smart contracts to execute trades without a middleman While ensuring decentralized NFT transfers, they also enable functions such as timed auctions, collection bids and more.

Powering DeFi Platforms

Smart contracts also enable decentralized finance (DeFi) apps, to handle the decentralized processing necessary for operating platforms that offer blockchain loans, staking, token trading, and more. Since DeFi platforms concern significant amounts of money, the robustness and security of these smart contracts is paramount.

Unlocking Decentralized Governance Systems

Smart contracts are also at the heart of Decentralized Autonomous Organizations (DAOs). With a smart contract, you can deploy governance tokens and implement governance mechanisms to allow any group to function autonomously—without a single leader. In the future, this could revolutionize countless voting systems—possibly even nationally and internationally!

Types of Smart Contracts

There are lots of different types of smart contracts, but let’s take a look at some of the most important types you may encounter.

Fungible Token Contracts

Fungible tokens are interchangeable: you can swap one for another identical item. In blockchain fungible tokens are often used as in-game currencies, governance tokens, utility tokens and more. And like all Ethereum tokens, they are powered by smart contracts.

ERC-20

ERC-20 is the foundational standard for fungible tokens, enabling tokens with identical properties to be traded or used interchangeably. Its simplicity and widespread adoption make it the go-to standard for tokenized assets.

Today, ERC-20 is still the most widely used standard for fungible tokens, enabling seamless token creation and compatibility with wallets, exchanges, and decentralized applications.

ERC-4626

ERC-4626 is an extension of the ERC-20 standard, designed for yield-bearing tokens used in decentralized finance. It standardizes how vaults interact with yield-generating protocols, ensuring compatibility and efficiency.

Semi-Fungible Tokens (ERC-1155)

Smart contracts also power ERC-1155 tokens, a standard that supports both fungible and non-fungible tokens within the same contract. This is particularly useful in web3 gaming, where a developer might need fungible tokens (like currency) alongside unique items (like weapons). It also allows users to create multiple sets of interchangeable items, such as 200 interchangeable swords and 200 interchangeable hats for the same game.

NFT Smart Contracts

NFTs (non-fungible tokens) are unique, verifiable digital assets, and they are also powered by smart contracts. NFT smart contracts can enable unique collectibles, generative art projects, or tokenized memberships. With todays range of contracts, developers also have the power to integrate advanced features like dynamic metadata, where the NFT evolves or changes based on external triggers, such as game achievements or real-world events.

There are countless NFT smart contract standards today, but some of the most popular include:

ERC-721

ERC-721 was the first standard for non-fungible tokens. Each token is unique and cannot be directly swapped with another, making it ideal for assets like art, collectibles, and in-game items.

ERC-721A

ERC-721A is a more gas-efficient version of ERC-721, optimized for batch minting of NFTs. It is commonly used in NFT collections, enabling developers to reduce transaction costs while maintaining functionality. (It's also the token standard used for thirdweb's NFT Drop smart contract!)

Smart Wallet Contracts

Smart wallet contracts extend what was previously possible with a web3 wallet. Smart crypto wallets enable features like gasless transactions, programmable wallets, and enhanced security through advanced account management.

ERC-4337

ERC-4337 introduced the infrastructure necessary for account abstraction, allowing users to interact with blockchain applications without relying on traditional externally owned accounts (EOAs) or private keys. For these reasons, ERC-4337 is particularly valuable for onboarding new users into blockchain applications, removing the technical barrier to entry.

That said, smart wallets are also handy for crypto-natives, offering options for implementing automated payments, multisig wallets, social recovery and more.

Governance Smart Contracts

Governance smart contracts are foundational to decentralized autonomous organizations (DAOs). These smart contracts facilitate proposals, voting, and the execution of on-chain actions based on collective decisions. For example, a proposal might update interest rates or integrating new assets into a defi app or platform.

By embedding governance rules directly into the blockchain, they eliminate the need for centralized oversight and empower communities to manage shared resources and protocols democratically. Typically participants must cast their votes in a predefined window. If the proposal is passed by a majority of voters, the smart contract can execute actions automatically.

What Are Examples of Smart Contracts?

NFT Drop Contract

The NFT Drop contract is designed to simplify the creation, minting, and distribution of NFTs. It’s built on the ERC-721A standard, allowing developers to launch NFT collections with features such as:

• Batch Minting, allowing you to create entire collections of NFTs at once!
• Delayed Reveals, so you can reveal NFT art at a later set time
• Allowlists, so you can grant minting access to pre-approved wallets

MarketplaceV3 Smart Contract

The MarketplaceV3 smart contract powers decentralized marketplaces, enabling seamless buying, selling, and auctioning of NFTs. It’s designed for flexibility, allowing custom transaction fees and integration with existing collections.

The marketplaceV3 contract:

• Facilitates trading of ERC-721 and ERC-1155 tokens.
• Allows creators to set royalty fees for secondary sales to build recurring revenue streams.
• Supports timed auctions with automated bidding and resolution processes.

Account Factory Contract

The Account Factory smart contract enables developers to create programmable, modular smart wallets for users using the ERC-4337 standard. thirdweb's smart wallets can:

• Unlock gasless transactions, social recovery and multisig functionality
• Bundle multiple transactions into a one, thus saving gas and improving usability.
• enable custom functionalities such as automated payments or on-chain voting.

How Does a Smart Contract Work?

You already know a smart contract is a program, so let’s dive into its anatomy and break down how it actually works.

What Does a Smart Contract Look Like?

At its core, a smart contract is code: a program written in a blockchain-specific programming language, such as Solidity. These languages integrate features like gas optimization and strict type systems to reduce errors and improve efficiency.

Example of Solidity Smart Contract

Here’s a basic example of a Solidity smart contract that facilitates simple token transfers:

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

contract SimpleToken {
    mapping(address => uint256) public balances;

    constructor() {
        balances[msg.sender] = 1000; // Initial supply assigned to contract creator
    }

    function transfer(address recipient, uint256 amount) public {
        require(balances[msg.sender] >= amount, "Insufficient balance");
        balances[msg.sender] -= amount;
        balances[recipient] += amount;
    }
}

In this example:

• The balances mapping tracks token balances for each address.
• The constructor initializes the contract and assigns tokens to the creator.
• The transfer function allows users to send tokens, ensuring they have enough balance to do so.

Types of Functions in Smart Contracts

Smart contracts typically include a few types of functions, such as

Public Functions

Public functions can be called by any user or contract. For example, transfer allows users to send tokens.

Private/Internal Functions

Private functions are only accessible by the contract itself or its derived contracts. These are often used for internal logic.

View or Pure Functions

View or Pure functions are read-only functions that do not modify the blockchain state such as querying balances.

Payable Functions

Payable functions are specifically designed to handle incoming cryptocurrency payments.

Step-by-Step Process: What Happens When a Smart Contract is Called?

So now you know all about the anatomy of a smart contract, let’s see how it works when it’s called.

Step 1: A user interacts with the smart contract

A user will send a transaction concerning the smart contract, typically including:

• The function to call (e.g., transfer).
• Input data (e.g., the recipient's address and the amount to transfer).
• Optional cryptocurrency value (if the function requires payment).

Step 2: The transaction is broadcast and validated by the network

If the transaction meets the protocol’s rules, such as including enough gas fees to cover execution, it’s validated.

Step 3: The smart contract is executed.

Once validated, the transaction is added to a block, and the smart contract executes the requested function. To do so, the smart contract will:

• Read the state of the blockchain (to check the sender’s address and balance).
• Run the contract’s logic (verify all conditions are met)
• Update the state (remove the tokens from one account and add them to the other)

Step 5: The transaction is finalized.

The smart contract’s output is recorded on the blockchain, the transaction is finalized, and the user is charged the gas fee based on the work required to process the transaction. The user can verify the results, such as the updated balances, via blockchain explorers.

How Do I Create a Smart Contract?

Deploying a smart contract has never been easier thanks to thirdweb Contracts. thirdweb Contracts offers modular contracts, so you can add or remove any features you'd like. It also offers a library of smart contract templates and examples to work from. And finally, there's the deployment tool, letting developers deploy smart contracts with ease.

Find the full article on how to deploy any smart contract via thirdweb here. And for the technical process of how to deploy smart contracts, check out our support docs here. But if you want to know right now: here’s the basics of what you’ll need to do to deploy any contract via thirdweb.

1. Install Node.js and the thirdweb CLI

To get started, you'll need Node.js and the thirdweb CLI prepared.

2. Choose or write a smart Contract

Next, you'll need a smart contract. Either write your own smart contract or use one of thirdweb’s prebuilt smart contract templates.

3. Connect your wallet to the thirdweb CLI

Connect your wallet to the thirdweb CLI and then configure a new project.

5. Choose the chain you want to deploy your contract on

With thirdweb, you can choose to deploy a smart contract on any of the 2000+ EVM chains out there! Just choose a smart contract and deploy on the EVM chain that fits you best.

6. Deploy your smart contract

Once you've deployed the smart contract, you'll receive the smart contract address. Copy it down! You can verify it on a blockchain explorer (like Etherscan) and from there, easily integrate it into your application using thirdweb’s SDK.

What is a Smart Contract Audit?

Before deploying a smart contract, auditing is essential to ensure it is secure and robust. Auditors review the code to identify vulnerabilities like reentrancy attacks, overflow errors, or improper access controls. Audits also assess the contract’s functionality, ensuring it behaves as expected under a variety of conditions.

However, auditing does cost! And if you're starting a small project, that might be a challenge. In these cases, using a pre-audited smart contract template, such as those you can find through thirdweb Explore, is a great option! Why not choose something that performs: efficiently, securely and with so many customizable options?

Smart Contracts: The Backbone of Web3 App Development

For developers, smart contracts are more than just code—they’re the foundation of blockchain applications. They automate processes, enforce rules, and eliminate intermediaries, enabling decentralized systems to function efficiently and transparently.

Whether you’re building blockchain games, launching NFTs, or creating decentralized finance platforms, mastering smart contracts is essential. By understanding their functionality and applying best practices, developers can create applications that not only meet current needs but also inspire future innovation

Ready to start building smart contracts yourself? Build the smart contract that fits your app with thirdweb!