# What is a smart contract?

> A smart contract is code on a blockchain that enforces a deal on its own. How they work, their uses, the risks, and whether they are legally binding in Australia.

Learn Crypto · 8 min read

On this page

1. How do smart contracts work?
2. A smart contract example: the vending machine
3. What are smart contracts in crypto?
4. Where they are used
5. What does running one cost?
6. Benefits
7. Smart contracts vs traditional contracts
8. Which blockchains run smart contracts?
9. Are smart contracts legally binding in Australia?
10. Risks and limitations
11. Who invented smart contracts?

![A violet contract page embossed with code brackets in a silver clip](/media/2026/07/edu-what-is-a-smart-contract-hero.webp?v=270dfe20)

**Key takeaways**

- Once deployed, a smart contract's terms are fixed, unless it was built with an upgrade key that lets its holder change them.
- When the conditions are met, the contract runs. No sign-off, no paperwork, no third party.
- Smart contracts power token transfers, swaps, escrow and most of what happens on chain beyond simple payments.
- Ethereum made smart contracts mainstream, but many blockchains run them today.
- The code is only as good as the people who wrote it. Bugs and exploits are the main risk.

## Definition

A smart contract is a self-executing program stored on a blockchain. It runs automatically when its pre-set conditions are met, moving value between parties without a bank, broker or agent in the middle.

## Understanding smart contracts

A smart contract does one thing a paper contract cannot: it enforces itself. The terms live in code on a blockchain, and the network executes them automatically.

Traditional contracts rely on trust and enforcement. You sign, you hope the other side follows through, and if they do not, you call a lawyer.

Smart contracts flip that model. The agreement is written as code and deployed to a [blockchain](/education/what-is-blockchain/), where every node stores a copy. Once the coded conditions are satisfied, the contract executes itself and the outcome is recorded permanently. Nobody can quietly change the terms afterwards, and nobody needs to chase the other party for payment.

You will also hear them called smart agreements or self-executing contracts.

### How do smart contracts work?

Every smart contract follows the same basic loop:

1. **Write the terms.** The rules of the agreement are coded as "if this, then that" logic. If the buyer sends the funds, then release the asset. On Ethereum this is typically written in a language called Solidity.
2. **Deploy to the blockchain.** The contract is compiled and published to the network, where the blockchain's runtime (on Ethereum, the Ethereum Virtual Machine, or EVM) can execute it. From that point it is public, verifiable and tamper-resistant.
3. **Trigger the conditions.** A user (or another contract) interacts with it: sending funds, signing with a private key, or supplying data the contract is waiting on.
4. **Execute and settle.** The contract runs exactly as written, the value moves, and the result is recorded on chain for anyone to verify.

No step needs a human to approve it. That is the point.

### A smart contract example: the vending machine

A vending machine is a dumb box, yet it handles an entire transaction on its own: you insert the right amount of money, you press B4, and the machine releases your snack. No shopkeeper, no receipt, no trust required.

A smart contract works the same way, just with anything of value. Send the required amount of [cryptocurrency](/education/what-is-cryptocurrency/) to the contract, satisfy its conditions, and it releases whatever it holds: tokens, funds in escrow, ownership rights. The rules and outcomes are fixed in advance, so as long as the code is sound, both sides get exactly what was agreed.

Here is a second example, end to end: parametric flight-delay insurance.

- **The trigger.** You buy a policy before you fly. Your premium goes into the contract, which also holds the insurer's payout funds, and the policy terms (your flight number, the delay threshold, the payout) are locked into the code.
- **The condition.** The contract watches a flight-status data feed. If your flight lands inside the threshold, nothing happens and the premium is the insurer's. If the feed reports a delay past the threshold, the condition is met.
- **The settlement.** The contract pays the agreed amount straight to your wallet. No claim form, no assessor, no waiting on a cheque. The whole dispute-prone middle of an insurance claim is replaced by one automatic step.

### What are smart contracts in crypto?

In crypto, smart contracts are the machinery behind almost everything that is not a plain coin transfer. They create and manage tokens, run exchanges of one asset for another, hold funds in escrow, and distribute rewards, all automatically.

Chains of smart contracts working together form DApps (decentralised applications), apps that run on a blockchain instead of a company's servers; the full definition lives in our [crypto terms glossary](/education/common-crypto-terms-slang/). And when those DApps recreate financial services like lending and borrowing, you get [decentralised finance (DeFi)](/education/what-is-defi-decentralised-finance/), which has its own explainer.

### Where they are used

Smart contracts already run payments and escrow, token creation and automated insurance payouts. Anywhere an agreement can be reduced to clear rules, code can run it:

- **Payments and escrow.** Funds release automatically when goods arrive or a service is confirmed.
- **Token creation.** Most crypto tokens are themselves smart contracts, built to shared standards like ERC-20 for interchangeable tokens and ERC-721 for [NFTs](/education/what-is-an-nft/), which prove ownership of unique digital items.
- **Insurance.** Claims that pay out the moment verifiable criteria are met, like the flight-delay example above, with no claims department in between.
- **Supply chains.** Each handover in a supply chain confirmed and recorded automatically, visible end to end.
- **Digital identity.** Credentials you own and control, verified against a blockchain instead of a company database.
- **Real estate and asset transfer.** Ownership changing hands the instant payment lands, with the record stored permanently on chain.
- **Voting.** Votes recorded on chain and counted automatically, with no way to quietly edit the tally afterwards. Securing the rest of the voting process is the hard part.

Some of these are live today, others are still being built. The pattern is the same everywhere: replace a paper process and a middleman with rules that enforce themselves.

### What does running one cost?

Smart contracts remove intermediary fees, not fees altogether. Every time a contract executes, the network's computers do real work, and they charge for it. That charge is the network transaction fee in the comparison table below; on Ethereum it is called gas.

Three things drive the cost:

- **Complexity.** A simple token transfer is cheap. A contract that loops through positions, checks data feeds and updates balances burns more computation, so it costs more.
- **Deployment vs use.** Publishing a new contract to the chain costs far more than interacting with one that already exists, because the network has to store the whole program forever.
- **Congestion.** Fees float with demand for block space. The same transaction can cost cents in a quiet hour and much more when the network is busy, and each blockchain prices this differently.

The trade still usually favours the contract: a network fee on an automated escrow is a different order of expense to an agent's commission. But "no middleman" never means "free".

### Benefits

- **No middleman.** The contract enforces itself, so there is no third party to pay or to trust.
- **Speed.** Execution and settlement happen in one automatic step, not days of processing.
- **Lower cost.** Code does the work an agent, broker or clearing house would charge for.
- **Accuracy.** The contract executes exactly as written, every time. No manual handling, no processing errors.
- **Transparency.** The code and every execution are recorded on a public blockchain, open for anyone to verify.
- **Security.** Tampering with a deployed contract means beating the entire network, not one office server. That protects the contract from tampering, not from flaws in its own code.

### Smart contracts vs traditional contracts

|  | Traditional contract | Smart contract |
| --- | --- | --- |
| Written in | Legal language | Code |
| Enforced by | Courts and lawyers | The blockchain network |
| Execution | Manual, requires follow-through | Automatic when conditions are met |
| Speed | Days to months | Seconds to minutes |
| Cost | Legal and intermediary fees | Network transaction fees |
| Changes | Renegotiable | Fixed once deployed (unless built to be upgradeable) |
| Flexibility | Handles ambiguity and intent | Only what the code specifies |

Neither wins outright. Traditional contracts handle nuance, judgment and disputes. Smart contracts handle precision, speed and scale. Expect both, often side by side.

### Which blockchains run smart contracts?

Ethereum, Solana, BNB Chain, Cardano, Avalanche and Tron all run smart contracts. Bitcoin sits outside that list on purpose: its scripting is deliberately minimal, which is why smart contract activity lives mostly on purpose-built platforms.

[Ethereum](/insights/what-is-ethereum-australia/) pioneered general-purpose smart contracts. The rest each make their own trade-offs between speed, cost and how their [proof-of-stake consensus](/education/what-is-proof-of-stake-pos/) is designed.

### Are smart contracts legally binding in Australia?

Smart contracts can be legally binding in Australia. Australian contract law is technology-neutral, and the [Electronic Transactions Act 1999 (Cth)](https://www.legislation.gov.au/C2004A00553/latest) recognises that agreements formed and executed electronically can be valid. If a smart contract captures the usual elements of a contract, offer, acceptance, consideration and intention to be bound, the fact that it is written in code does not stop it from being enforceable.

The practical catch is newer than the law: courts are still working out how to interpret code as terms, and how to unwind a contract that has already self-executed. Treat significant smart contract arrangements the way you would any contract and get proper legal advice. This article is general information, not legal advice.

### Risks and limitations

- **Bugs in the code.** A smart contract does exactly what it says, including the mistakes. Flawed code has been exploited to drain funds, and there is no undo.
- **Immutability cuts both ways.** The tamper-resistance that makes contracts trustworthy also makes errors permanent once deployed. Some contracts sit behind an upgradeable proxy so the code can be replaced later, which trades immutability for the ability to fix bugs and means trusting whoever holds the upgrade key.
- **The oracle problem.** Contracts that depend on real-world data (prices, weather, delivery confirmations) are only as reliable as the feed supplying it. Decentralised oracle networks like Chainlink exist to make those feeds harder to tamper with.
- **Evolving rules.** Regulators worldwide, including in Australia, are still building frameworks around smart contracts, so the compliance picture keeps moving.
- **Scams wear the same clothes.** Anyone can deploy a contract, and malicious ones look legitimate at a glance. Interact only with audited, well-known contracts.

Most of these are growing pains of a young technology, but they are real today. Read before you sign, even when the signature is a private key.

### Who invented smart contracts?

Computer scientist and cryptographer Nick Szabo coined the term in 1994, fifteen years before Bitcoin brought the first working blockchain online. His insight was that contract terms could be embedded in code, and Szabo famously used the vending machine as his model. The idea sat waiting for infrastructure that could run it without a trusted operator; blockchains eventually provided exactly that, and Ethereum's launch turned Szabo's concept into a working, general-purpose system.

Today smart contracts are the plumbing behind tokens, DApps and DeFi. If you want to hold the assets these platforms are built on, Digital Surge is an AUSTRAC-registered Australian crypto exchange where you can [buy Ethereum](/buy/eth/) and hundreds of other coins from $1 AUD.

About the author

The Digital Surge Editorial Team

Our editorial team writes and reviews Digital Surge’s news, insights and crypto guides, pairing plain-English explanations with the practical experience of running an [Australian cryptocurrency exchange](/about-us/). We keep every article accurate, current and easy to act on.

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*Source: [What is a smart contract?](/education/what-is-a-smart-contract/) · Last updated: 2026-07-29*