What are smart contracts?

What is a smart contract?

A smart contract is a program stored on a blockchain that applies instructions when a transaction calls it. On Ethereum, the program has an address, code and stored data. It can keep track of token balances, check conditions and transfer assets according to its coded rules.

For example, a token contract can record how many tokens each address controls. When a holder authorises a transfer, the program checks the request and updates the balances. The network's participants execute the rules and agree on the resulting record. The word contract describes the program here; it does not establish every legal right the participants may have outside the chain.

Ethereum is one example, rather than the only network supporting this type of application. Solana uses onchain programs to process instructions under its own program model. How a blockchain works explains the shared record beneath those applications.

What happens when the program runs?

Suppose a holder sends a token to another address on Ethereum. The wallet submits a signed transaction calling the token contract's transfer function. The network executes the function, checks its conditions and records the changed balances if the transaction succeeds.

The holder pays for the computation in Ether (ETH), Ethereum's native crypto-asset. The token being transferred can be something else. This is why an application may need ETH for gas fees even when the recipient receives a stablecoin or another token.

A contract does not wake up by itself because a date arrives or a price changes. A transaction has to cause its instructions to run. One contract can call another as part of that execution, which lets developers combine programs but also creates dependencies between them.

What are smart contracts used for?

Token contracts provide one concrete use. The ERC-20 standard defines common functions for fungible tokens, whose units are interchangeable. Compatible wallets and applications can use those functions to work with different tokens. The standard describes the interface; it does not certify an issuer's backing or a token's value.

In DeFi, contracts can handle token exchanges or borrowing against collateral. In tokenisation, they can record ownership and apply transfer restrictions for a represented asset. The wider Web3 application includes the website or other interface through which a person reaches those contracts.

Applications also run on networks connected to Ethereum, such as Arbitrum. Which network executes the transaction matters for fees and for the services on which the application depends.

Why outside information needs an oracle

A contract can read blockchain data available to it, but cannot independently look up an outside market price or confirm that goods were delivered. An oracle supplies information from outside the chain in a form the program can use. That connection is the oracle problem.

Consider a lending contract that allows borrowing against crypto-assets. It needs a price to compare the collateral with the outstanding debt. If the supplied price is wrong or late, the program may apply its rules to the wrong information. Correct execution cannot repair an incorrect input.

Chainlink provides oracle infrastructure for delivering data to contracts. LINK is distinct from the assets handled by the application. Virtune Chainlink ETP gives price exposure to LINK through a security; holding this Chainlink ETP does not operate an oracle or grant access to the contracts using its data.

What can go wrong?

A coding error can cause an unintended transfer or leave assets locked. Combining contracts means an application may also rely on another program whose failure reaches its users. A code audit can identify problems, but does not establish that every bug has been found.

Some contracts give administrators powers to pause functions, change parameters or introduce upgrades. The people holding those keys can therefore affect the service, even when its transactions are publicly visible. These are questions about contract security and control, rather than proof that public code is automatically reliable.

A token permission is another form of control. An approval can let a contract spend tokens up to an allowance; closing the website does not cancel the permission stored in the token contract. The ERC-20 interface includes these allowances.

Finally, a program moving a token does not prove ownership of an asset held elsewhere. If a token represents a bond or a physical asset, the issuer's obligations and the holder's enforceable rights need an arrangement beyond the code.

Using Ethereum and holding an Ethereum ETP

Virtune Staked Ethereum ETP provides ETH price exposure through a security. The staked Ethereum ETP does not give its holder a wallet, the ability to call contracts or rights to the assets those contracts manage. The Ethereum guide explains ETH's network role, and the ETP guide explains the security.