Smart contracts are a core component of blockchains such as Ethereum, so it’s important to understand how they work. A ‘smart contract’ is an agreement in the form of computer code that is programmed to automatically execute when certain requirements are met. These smart contracts live on the blockchain, so they are indelible and cannot be changed.
How does a smart contract work?
If you’re unfamiliar with computer coding, you might be wondering how lines of code could translate to the trustless, accurate and secure transactions you’ve experienced when interacting with a blockchain. Smart contracts work by following simple “if/when… then…” statements. A basic example of this in the world of crypto would be: if someone transfers 1 ETH to this wallet address, then they received an ERC721 token from another wallet address. These “if/when/then” statements are executed when the predetermined conditions coded into the smart contract have been met.
What are the benefits of smart contracts?
- Trustless: When a transaction is actioned as part of a smart contract, it’s coded to be processed if all requirements are met. This removes the need for any third-party execution.
- Accuracy: Once again, the programmatic nature of smart contracts offers a way to avoid human error. If the code itself is correctly mirroring the requirements that were decided upon to be included in the smart contract, all interactions henceforth will follow those conventions.
- Transparency: The blockchain is a digital ledger accessible to everyone. If you want to dive deeper into the terms and conditions of a smart contract, that information is fully visible on the blockchain.
Smart contracts and Tax
As mentioned earlier, smart contracts form the basis of many transactions on the blockchain. Any transaction executed by a smart contract, whether it be a buy/sell, a swap, a deposit, will have its own tax implications. Where possible, our software assesses the programming of a smart contract to determine what auto-categorization measures best apply when the transaction is imported into our app.
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