<p>Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They automate the execution of an agreement as soon as predefined conditions are met. This technology is integral to the functioning of many blockchain networks, with <a href="/NewSite/encyclopedia/ethereum/" class="ency-link">Ethereum</a> being one of the most prominent platforms for smart contract development.</p>

<h2>How It Works</h2>
<p>Smart contracts operate on a blockchain network, typically using a programming language like Solidity for Ethereum. Here's a simplified breakdown of how they work:</p>
<ul>
  <li><strong>Deployment:</strong> The contract's code is deployed to the blockchain, creating a unique address where the contract lives.</li>
  <li><strong>Interaction:</strong> Users can interact with the contract by sending transactions to its address, triggering predefined functions.</li>
  <li><strong>Execution:</strong> The contract's code is executed on the blockchain nodes, and the results are recorded on the blockchain.</li>
  <li><strong>State Changes:</strong> The contract's state changes based on the outcome of the executed code, and these changes are reflected on the blockchain.</li>
</ul>

<h2>Why It Matters</h2>
<p>Smart contracts have significant practical relevance, particularly in the realm of decentralized finance (<a href="/NewSite/encyclopedia/defi/" class="ency-link">DeFi</a>). They enable:</p>
<ul>
  <li><strong>Automation:</strong> Smart contracts automate processes, reducing human intervention and the risk of human error.</li>
  <li><strong>Trustlessness:</strong> As they operate on the blockchain, smart contracts eliminate the need for intermediaries, increasing trust and security.</li>
  <li><strong>Transparency:</strong> The code of smart contracts is publicly visible, allowing anyone to scrutinize and verify their functionality.</li>
  <li><strong>Versatility:</strong> Smart contracts can be used to create a wide range of applications, from decentralized exchanges to lending platforms and more.</li>
</ul>