What is a smart contract? | Coinbase
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Why are smart contracts important?
Smart contracts allow developers to build a wide variety of decentralized apps and tokens. They’re used in everything from new financial tools to logistics and game experiences, and they’re stored on a blockchain like any other crypto transaction. Once a smart-contract app has been added to the blockchain, it generally can’t be reversed or changed (although there are some exceptions).
Smart-contract-powered apps are often referred to as “decentralized applications” or “dapps” – and they include decentralized finance (or DeFi) tech that aims to transform the banking industry. DeFi apps allow cryptocurrency holders to engage in complex financial transactions — saving, loans, insurance — without a bank or other financial institution taking a cut and from anywhere in the world. Some of the more popular current smart-contract powered applications include:
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Uniswap: A decentralized exchange that allows users, via smart contract, to trade certain kinds of crypto without any central authority setting the exchange rates.
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Compound: A platform that uses smart contracts to let investors earn interest and borrowers to instantly get a loan without the need for a bank in the middle.
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USDC: A cryptocurrency that is pegged via smart contract to the US dollar, making one USDC worth one U.S. dollar. UDDC is part of a newer category of digital money known as stablecoins.
So how would you use these smart contract-powered tools? Imagine you’re holding some Ethereum that you’d like to trade for USDC. You could put some Ethereum into Uniswap, which, via smart contract, can automatically find you the best exchange rate, make the trade, and send you your USDC. You could then put some of your USDC into Compound to lend to others and receive an algorithmically determined rate of interest — all without using a bank or other financial institution.
In traditional finance, swapping currencies is expensive and time consuming. And it isn’t easy or secure for individuals to loan out their liquid assets to strangers on the other side of the world. But smart contracts make both of those scenarios, and a vast variety of others, possible.
