Smart contracts are what make Ethereum different from Bitcoin. Not the price. Not the market cap. The fact that you can write a programme that lives on the blockchain and runs automatically, with no company behind it and no server that can be switched off.

What is an Ethereum smart contract?

Nick Szabo described the concept in 1994. Ethereum made it work on a public blockchain in 2015.

A smart contract sits at its own address on the Ethereum network. It can hold ETH, send ETH, and talk to other contracts. Every interaction is recorded on-chain permanently. No company controls it once it is deployed. No bank, no individual, nobody. It runs exactly as written, every single time.

If you have ever swapped tokens, borrowed from a DeFi protocol, or held a stablecoin, you have used one.

How smart contracts run on the Ethereum Virtual Machine?

Every node on the Ethereum network runs the same piece of software called the Ethereum Virtual Machine, or EVM. When a transaction triggers a smart contract, every node executes the same code and reaches the same result. No single party controls the outcome. That is what trustless actually means.

Running a contract costs gas, paid in ETH. Simple operations cost very little. Complex logic costs more. Gas exists to prevent infinite loops and make sure computing resources are used fairly. The cost is the point.

Solidity, Vyper and the developer stack

Most Ethereum smart contracts are written in Solidity, a language built specifically for the EVM. Vyper is an alternative, simpler and easier to audit, with a syntax closer to Python. Both compile down to EVM bytecode, the format the network actually reads and executes.

Once deployed, a contract is permanent. Developers use Hardhat and Foundry to build and test before anything goes live. Remix IDE works for quick prototyping. OpenZeppelin libraries provide audited, reusable code for standard token formats like ERC-20 and ERC-721, which cuts down the chance of repeated mistakes significantly.

What can you build with smart contracts?

Most of what happens on Ethereum is a smart contract.

Aave lets users lend and borrow without a bank. Uniswap handles token swaps without an exchange. MakerDAO issues DAI entirely through on-chain logic. CryptoPunks and Bored Ape Yacht Club are ERC-721 contracts. USDC and USDT are ERC-20 contracts. Uniswap's treasury is governed by a DAO that runs on smart contracts. Tokenised US treasury funds from BlackRock and Franklin Templeton are smart contracts too.

The range keeps growing.

Risks, audits and the cost of being immutable

Immutability is what makes smart contracts valuable. It is also what makes bugs in them so costly.

A flaw cannot be patched after deployment. The 2016 DAO hack drained around $60 million worth of ETH through a flaw in the contract's own code. The 2022 Wormhole bridge exploit cost $325 million. Neither was a failure of the Ethereum network itself. Both were failures in individual contracts.

Auditing firms like OpenZeppelin, Trail of Bits, and ConsenSys Diligence review contract code before it goes live. Formal verification tools prove mathematically how a contract will behave. For investors evaluating protocols, audit history and active bug-bounty programmes are real signals about how seriously a team takes security.

Ethereum Smart Contracts and How They Power Web3