Smart contract

A smart contract is code deployed to a blockchain such as Ethereum. Once deployed, it holds state and assets and runs exactly as written whenever users or other contracts call it, with every execution recorded on-chain. Because the code is public and the network enforces it, parties can transact according to its rules without trusting a single intermediary.

Smart contracts underpin decentralized finance, stablecoins, tokenized assets, and many other applications. They can automate escrow, lending, trading, collateral management and compliance rules such as transfer restrictions. The main risks are coding errors and exploits, since bugs can be irreversible and have led to large losses, as well as governance risk when contracts can be upgraded by a small set of key holders. Audits and formal verification reduce but do not eliminate these risks.

For allocators, smart contracts are both an efficiency gain and a distinct operational risk to diligence. Example: a lending protocol’s smart contract automatically liquidates a borrower’s collateral when its value falls below a set ratio of the loan.