Smart Contracts - Valkyrie

Smart Contracts

Key takeaways

  • Bitcoin serves as a store of value, as the Bitcoin blockchain only supports the saving or spending of bitcoin.
  • Many blockchains, such as Ethereum, Solana, Cardano, Avalanche and others, can run smart contracts, computer programs that enable digital applications (dApps)
  • Digital applications powered by smart contracts enable a number of new financial services to be build on blockchains.  These include futures and options, insurance, and the borrowing and lending of assets
  • In smart contracts, the code is the law, so make sure that you understand the code and have verified it is free of exploitable errors that can lead to a loss of value

While bitcoin is designed as a trading vehicle and store of value, assets on the Ethereum blockchain are powered by smart contracts.  Smart contracts are self-executing computer programs executed by the globally distributed Ethereum Virtual Machine (EVM) that is maintained by a network of computer owners called validators.  Fees for execution of the smart contracts, also called gas fees, are paid in ether (ETH).  While Ethereum was the first blockchain to offer smart contracts, a number of other blockchains now offer the same service.  These include Solana, Cardano, Avalanche, and others. 

Smart contracts may access digital applications (dApps) that provide services such as borrowing and lending, futures and options, or insurance.  Uniswap is a decentralized exchange (DEX) that is built on top of the Ethereum blockchain.  There is no limit to the ingenuity of applications that can be enabled through the use of smart contracts.  While some liken bitcoin to digital gold as a store of value, ether is likened to digital oil, or a raw material that facilitates commerce. 

The terms of a financial agreement can be directly written into the smart contract’s lines of code.  Users are encouraged to review the code before interacting with a dApp, or ensure that the smart contract has been audited by a team experienced in blockchain and smart contract software design.  Some smart contracts have been published with software bugs that allowed the contract to be exploited and value to be lost.