What is a smart contract?

A program at an address

A smart contract is "simply a program that runs on the Ethereum blockchain".¹ It is a collection of code, called its functions, and data, called its state. It sits at its own address.¹

Smart contracts are a type of Ethereum account. They have a balance, and people can send transactions to them.¹ But no person controls them. Once on the network, they run as programmed.¹ People use a contract by sending a transaction that runs one of its functions.¹

The vending machine

ethereum.org suggests a vending machine as perhaps the best comparison, an idea from Nick Szabo.¹ With the right inputs, a certain output is guaranteed: money plus a snack choice gives you the snack.¹ A smart contract has its rules programmed into it in the same way.¹ A vending machine removes the need for a shop worker. In the same way, smart contracts can replace middlemen in many industries.¹

The word "contract" can mislead. The Ethereum whitepaper says contracts are less like agreements to be "fulfilled". They are more like "autonomous agents" that run their code whenever a message or transaction pokes them.²

Who can make one

Anyone can write a smart contract and put it on the network.¹ Putting it there is called deploying. It is a transaction, so you pay gas, the network's fee for computing work. Deploying costs far more gas than a simple ETH transfer.¹

ethereum.org names two languages: Solidity and Vyper.¹ The code must be compiled first. That turns it into bytecode, low-level instructions the EVM can run.^1,3

Can it be changed?

By default, a smart contract cannot be deleted, and what you do with it cannot be undone.¹ The program at a contract's address cannot be changed once it is deployed.^4,5

There is a catch. Developers can build in a way to upgrade. A common one splits the contract in two: a proxy contract that keeps the data, and a logic contract that holds the code.⁶ Every call goes to the proxy, which passes it on to the logic contract. The logic contract can be swapped for a new one.^6,5

With upgrades, users must trust the developers not to change things at will.⁵ Two safeguards help. A multisig means an upgrade needs several people to sign it. A timelock is a forced delay before an approved change takes effect, so users can leave if they disagree.⁵

A multisig needs a set number of signatures out of a group of signers. For example, 3 out of 5 is common.¹

When the code is wrong

A bug in deployed code usually cannot be patched, and stolen funds are mostly impossible to get back.⁶ ethereum.org lists the DAO hack, in which 3.6 million ETH was stolen, among the best-known cases.⁶

To check what a contract really does, look for verified source code. Verification shows that the published code is the same code running at the contract's address.³

Smart contracts also cannot fetch real-world facts, such as prices, by themselves. Tools called oracles bring outside data in.¹