What Are Smart Contracts in Crypto and How Do They Work?

Smart contracts are changing the way agreements are executed in the digital world. But what are smart contracts in crypto? The idea of smart contracts was first proposed by American cryptographer and computer scientist Nick Szabo in 1994 who believed that smart contracts could transform electronic transactions. Smart Contracts in digital space began with the introduction of the Ethereum blockchain in 2015, and they facilitate much of the everyday interactions of an average NFT enthusiast today.

Read on to learn more about what are smart contracts in crypto, and how they are changing the gaming, finance, and other industries. You’ll also learn their key features, advantages, and their impact on the web3 market.

Key Features of Smart Contracts:

• Decentralization: Stored on a blockchain, a distributed database that can’t be altered, smart contracts are distributed across all nodes in the blockchain network
• Immutability: Once deployed, smart contracts can’t be altered offering a high level of trust and transparency
• Automation: Smart contracts operate on an “if-then” basis, so they only act when certain conditions are met
• Trustless Execution: Smart contracts remove the need for intermediaries or third parties

What are Smart Contracts in Crypto

A Smart Contract is a piece of code that allows for complex transactions to occur on a blockchain. They automatically proceed with the tasks when certain conditions are met. By removing intermediaries, smart contracts offer more security, transparency, and speed in the tech world.

Basic Smart Contracts can allow a buyer to acquire an NFT for a set number of tokens, or allow an NFT holder to prove his ownership to gain access to utility.

Advanced Smart Contracts can power highly-complex interactions, such as those found in blockchain games. For example, these may allow NFTs to be borrowed for set time periods, destroyed if certain criteria are met, or to allow the traits of an NFT to be upgraded.

How Smart Contracts Work

Smart contracts work around the blockchain’s decentralized ledger. Here’s a simple step-by-step breakdown:

• Creation: A developer writes the smart contract using a blockchain-compatible language like Solidity for Ethereum or Rust for Solana.
• Deployment: The contract is uploaded to the blockchain network, so it becomes immutable and public.
• Execution: When the conditions are met the contract code executes your request automatically.
• Verification: Network nodes validate the transaction, ensuring consensus and security.
• Record Keeping: Each action is recorded on the blockchain, offering a transparent audit trail.

Here’s a real-world example; Imagine there is an online store where payment triggers shipping. If the buyer pays the amount the smart contract tells the warehouse to dispatch the product. If the payment is not made then the order is cancelled automatically. This streamlined process saves time and ensures there’s no need for manual intervention, making smart contracts more reliable and user-friendly.

What Are Smart Contracts Used For?

Smart contracts are used to facilitate, verify, or enforce a contract. Their use cases are across many industries. Here are some of the most common use cases of smart contracts:

1. Gaming, NFTs, and the Metaverse

Main use case:

Enabling secure, automated transactions, true ownership of digital assets, and decentralized marketplaces.

Examples:

Axie Infinity, a popular Ronin-based game, allows players to collect, breed, and battle fantasy creatures as NFTs, generating over $4 billion in revenue by early 2025.

Decentraland and The Sandbox are metaverse platforms where users can buy, sell, and develop virtual land and experiences, with Decentraland’s trading volume reaching $748 million at its peak in 2022.

The global blockchain gaming market, valued at $14.8 billion in 2024, is experiencing significant growth driven by increasing demand for decentralized gaming and blockchain technology integration. Projections suggest the market could reach $1.17 trillion by 2033, with a compound annual growth rate (CAGR) of 62.6%. Additionally, the metaverse is booming, with an estimated 400 million active users as of January 2025, further fueling the need for blockchain-based infrastructure.

These statistics underscore the rapid expansion of blockchain in gaming and metaverse.

2. Financial Services

Main use case:

Smart contracts are empowering decentralized platforms that eliminate intermediaries, providing greater efficiency and control to users.

Real examples:

Uniswap, a leading decentralized exchange (DEX) on the Ethereum blockchain, utilizes an Automated Market Maker (AMM) model for peer-to-peer trading of ERC-20 tokens. As of January 2025, Uniswap has a Total Value Locked (TVL) of approximately $6.25 billion and has generated over $100 million in fees in mid-2024 alone. The platform’s permissionless nature and non-custodial wallet structure ensure users maintain full control of their assets.

Compound, a decentralized lending and borrowing platform, facilitates over $3 billion in loans and manages over $1.2 billion in TVL. Its dynamic interest rate model, based on supply and demand, enables users to earn interest or borrow against their crypto assets without traditional credit checks.

Meanwhile, MakerDAO, with over $9 billion in DAI stablecoin supply, utilizes smart contracts to maintain the dollar peg of DAI, offering decentralized lending and borrowing.

These platforms—Uniswap, Compound, and MakerDAO—are changing traditional financial systems by enabling trustless, secure, and transparent financial transactions through smart contracts.

3. Supply Chain Management

Main use case:

Improving supply chain management by enhancing traceability, security, and efficiency.

Real examples:

Walmart’s implementation of blockchain technology for food traceability, starting in 2016, reduced the time it took to trace a product from six days to just 2.2 seconds, demonstrating a massive leap in operational efficiency.

Ensuring transparency across the supply chain – for example, Walmart’s blockchain system traced pork in China, while in 2019, it tracked shrimp from farms in India to U.S. retail locations for the first time. Smart contracts automate the verification of transactions, ensuring only authenticated products are processed, and help reduce food waste by providing accurate data on shelf life and product condition.

Additionally, blockchain enhances recall management by quickly pinpointing affected products, which is crucial for minimizing the spread of foodborne illnesses. This efficiency can significantly cut down on food waste—about 17% of global food production is wasted annually, with 13% of that coming from retail.

4. Real Estate

Main use case:

Smart contracts are enabling more efficient, secure, and transparent property transactions.

Real examples:

Propy, founded in 2015, is a pioneering platform that uses blockchain and smart contracts to streamline property buying, selling, and title transfer processes. Since its inception, Propy has successfully completed over 1,000 real estate transactions worth more than $1 billion. The platform enables fully online property deals, eliminating traditional intermediaries like brokers and lawyers. As of January 2025, Propy has tokenized properties valued at over $50 billion, offering fractional ownership and allowing for payments in both fiat and cryptocurrencies.

Additionally, RealT, a leader in fractional real estate ownership, uses tokenization to allow investors to buy shares in U.S. properties for as little as $50. With over 200 tokenized properties valued at $45 million, RealT has democratized access to the real estate market by enabling global investors to earn passive income through rental distributions paid in stablecoins.

Smart contracts in both platforms automate property transactions, reducing fraud risks and enhancing transparency. These innovations are providing lower barriers to entry, increased liquidity, and a more efficient way to manage and transfer property ownership.

5. Music and Entertainment

Main use case:

Automating processes, enhancing transparency, and providing artists with more control over their work and earnings.

Examples:

Platforms like Audius, a decentralized music streaming service, empower artists by allowing them to retain up to 90% of the revenue generated from their music—far higher than the 12% typically offered by traditional streaming services. Audius has garnered over 7 million monthly active users as of 2025 and integrates with TikTok to enhance exposure for artists.

Soneium, Sony’s blockchain platform launched in 2024, simplifies digital rights management and enables artists to tokenize their music for better royalty tracking and distribution.

Additionally, platforms like Ujo Music and Imogen Heap’s Mycelia use smart contracts to automate copyright management and ensure fair compensation for creators. The market for music NFTs reached $200 million in 2024.

While challenges such as legal frameworks and adoption barriers persist, the growing success of decentralized platforms signals a promising future for a more equitable and transparent music industry, where artists can engage directly with their fans, bypassing intermediaries and earning fairer compensation.

Technologies Behind Smart Contracts

Smart contracts are built on top of blockchain technology which supports several Programming Languages. Although other programming languages are emerging in smart contract development like Rust, Cairo, Yul, and others, two of them stand out; Solidity and Vyper.

Solidity: It’s a popular programming language of Ethereum Virtual Machine (EVM) that is also used across other EVM-compatible blockchain networks. Developers can write codes faster in Solidity but it has a higher gas fee compared to other blockchain programming languages

Vyper: It’s the second most popular and simplest alternative to Solidity. It’s a good starting point for Python developers who are starting their Web3 development since it feels like Python when using it.

Smart Contracts Market Growth and Stats

The smart contracts market is growing exponentially, statistics show that:

• Market Value: Estimated at $2.14 billion in 2024.
• CAGR: Projected to grow at 23.9% and reach $12.07 billion by 2032.
• Cross-chain: Interoperability between different blockchain networks.
• AI integration: Improve decision-making within contracts.
• Energy Efficiency: New blockchain protocols are focusing on reducing energy consumption, making smart contracts more sustainable.

Conclusion – Future of Smart Contracts

Smart contracts are transforming digital transactions by providing automation, security, and transparency across industries like finance, gaming, and real estate. These blockchain-based agreements eliminate intermediaries, reducing costs and improving efficiency.

While their benefits include immutability and trustless execution, challenges such as coding vulnerabilities, security risks, and legal uncertainties remain. Despite setbacks like the 2016 DAO hack, advancements in AI integration, cross-chain interoperability, and regulatory developments are driving adoption. With the market projected to grow significantly, smart contracts are poised to play a crucial role in the future of decentralized applications and Web3.

FAQ: Understanding Smart Contracts in 2025

What is a smart contract in blockchain?

A smart contract is a self-executing digital agreement stored on a blockchain. It automatically enforces terms when predefined conditions are met, removing the need for intermediaries. This makes transactions more secure, transparent, and efficient.

How do smart contracts work in crypto?

Smart contracts operate on an “if-then” basis. Once a specific condition is met, the contract executes automatically. Developers write them using programming languages like Solidity (Ethereum) or Rust (Solana). Once deployed, they are immutable and publicly accessible on the blockchain.

What are the key characteristics of smart contracts?

Smart contracts are decentralized, immutable, automated, and transparent. They ensure trustless execution, meaning no third party is needed for verification. These features make them ideal for industries like finance, gaming, real estate, and supply chain management.

Are smart contracts legally binding?

Smart contracts are legally recognized in some regions, but regulations vary worldwide. While they can enforce agreements automatically, legal enforceability depends on local laws. Some governments are working on frameworks to integrate smart contracts into legal systems.