There are several terms in the web3 space the average crypto enthusiast finds complicated. From experience, the concept of "smart contract" is one of them. It is a buzzword in the cryptocurrency world, but it is understood by few people.

Show an average crypto investor some pictorial charts indicating how smart contracts work on the blockchain, and they already look uninterested. All they care about is how to flip coins and identify the next 1000x.

While this is okay, it is also vital for anyone in the crypto space to know the foundations of the tokens they invest in. You don't want to be that investor who only apes into tokens and does not understand how the blockchain and the infrastructures that surround it work.

So here's the deal–if you've been wondering how a smart contract functions, plus the security challenges that pose some threats to it, this is the right piece to see. Let's dive in.

What are smart contracts?

Simply put, smart contracts are sets of codes that run on a distributed blockchain. It serves the role of an umpire for every transaction carried out on the blockchain. I'd simplify it further. Imagine what a football match between two competing teams looks like without a referee. Unorganised, right?

The difference between smart contracts and the football match is they are self-executing agreements of which the results on the blockchain, amongst other things, could be an exchange of assets between different parties. With smart contracts, transactions on the blockchain are automated, transparent, traceable, and cannot be altered.

The web3 space is characterised by anonymity, which makes trust amongst transacting parties a difficult one to come by. Smart contracts fill this gap, as it helps to ensure trustless and decentralised transactions among transacting parties.

As a matter of fact, participating parties don't have to worry about what goes on in the chain. As long as all the stipulated contract conditions are met, they'll be executed automatically.

Smart contracts and security challenges

Like any other emerging technology and innovation, smart contracts have flaws. One major challenge deployers of smart contracts face regarding security is data exposure. In the bid to ensure transparency, smart contracts are open to just anyone, whether on a public or private blockchain.

Although the contract's code is usually immutable, participants can see all the sensitive information stored on the blockchain. When this data is not adequately handled, malicious entities could prey on it for their unscrupulous activities.

As a matter of fact, one of the biggest hacks in the crypto world occurred in 2021. Hackers carted away $613 million worth of funds from Poly Network corporation. Hackers capitalized on the loopholes in the digital contracts utilized by Poly Network.

Another challenge with smart contracts is data breaches. For instance, transactions and data on a public blockchain are traceable, watering down users' privacy. However, there are privacy-focused solutions available to combat the issues around privacy.

Smart contracts–a work in progress

While there are vulnerabilities and challenges with smart contracts, it is pertinent for developers and blockchain enthusiasts alike to know development is continuous. An in-depth understanding of the infrastructures around smart contracts can further boost its security.

The more knowledgeable you become in the space, the more initiative you have to provide lasting solutions to lingering challenges.