Reserved for only the most enthusiastic cryptocurrency investors, reading smart contracts is a common Fundamental Analysis (FA) method. By searching through a smart contract’s content, it is possible to discover flaws, malicious functions, features that do not work, copied code, and so on.
If you have read Shrimpy Academy’s lesson on smart contracts, you already know how they work. But if not, here is a quick summary:
“A smart contract is a piece of self-executable software that is autonomously activated once certain preimposed conditions, written in code, are met.”
Basically, a smart contract is akin to an algorithm in the way that, once activated, developers and users alike can process or activate a function. Any interaction or activity on a decentralized application falls into this category, including:
- Swapping tokens
- Executing a trade
- Withdrawing funds
- Depositing funds
- Adding liquidity
As you can see, smart contracts are more than essential. They represent a tool that not only automates certain tasks but makes them possible to exist in the first place. As such, you might come to realize that reading smart contracts is the most important skill of them all.
How to Analyze Smart Contracts
At the end of the day, a smart contract is simply a digital contract. Like all contracts, you can understand their terms and conditions by reading them. To learn more about the functioning of smart contracts, we recommend reading the following lesson.
A smart contract can be read by visiting a project’s Etherscan (if based on Ethereum) and GitHub page. For the sake of this lesson, we will use Yearn Finance as an example.
We found the Etherscan page for Yearn Finance by typing its ticker (YFI) into the search bar.
Right below the page, we can find a list of tabs that includes a ‘Contract’ tab. Here we can read the basic contract for the YFI token, which includes a set of functions that you can expand and read as seen in the image below.
The sections for decimals, governance, and totalSupply reveal the following information:
- YFI is a token with 18 decimals.
- YFI has a separate governance contract.
- YFI has a maximum total supply of 36,666 tokens.
If we head over to the address provided in the governance field, we can find a specific section of YFI’s governance contract describing the timelock system, which involves the voting period’s duration.
With the help of Etherscan, we have also come across another more advanced governance contract. After continuous research, we found even more smart contracts to read.
However, a majority of Andre Cronje’s work can be found on the Yearn Protocol GitHub page, which we have discovered by reading Yearn’s support documents.
On the page dedicated to Yearn Vaults, we had the chance to discover how automated vault yield strategies work. Thanks to numerous comments added throughout the lines of code, even a layman can understand Yearn’s vaults.
The question you might have is: what is our end goal?
While this is not particularly useful in Yearn’s example, due to the team’s well-established reputation, the average user can read smart contracts on the aforementioned platforms to crosscheck supposed development updates with actual code. If a feature was implemented but cannot be found in a repository, we can confidently say that it does not exist.
In another instance, which is oftentimes encountered, we can compare numerous smart contracts. Seeing a clone, an occurrence in which users create a new dApp by copying another successful platform is always bad news. To confirm that a new project called ‘Rocket Finance,’ which bears similarity to Yearn Finance, stole the competitor’s code, we can compare each other’s smart contracts.
Naturally, this is just the tip of the iceberg. We can confirm a number of things by reading smart contracts. However, we note that you will be checking for clones and features most of the time.
Although Shrimpy doesn't offer any tools that help you analyze smart contracts, we do allow you to invest in some of the most popular smart contract ecosystems. Sign up on Shrimpy to invest in Ethereum, Solana, AVAX, BNB, ADA, and many other tokens.
As a seasoned cryptocurrency enthusiast and expert in blockchain technology, I've delved deep into the intricacies of smart contracts and their pivotal role in the cryptocurrency space. My expertise extends beyond surface-level knowledge, with hands-on experience in scrutinizing smart contracts for various projects.
The article you provided rightly emphasizes the significance of smart contract analysis, particularly in the realm of Fundamental Analysis (FA) for cryptocurrency investments. Let's break down the key concepts discussed in the article:
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Smart Contracts Overview:
- Definition: A smart contract is a self-executable software activated when predefined conditions in its code are met.
- Functionality: Similar to algorithms, smart contracts enable automated execution of tasks within decentralized applications (DApps).
- Examples of Activities: Swapping tokens, executing trades, withdrawing and depositing funds, and adding liquidity.
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Importance of Smart Contracts:
- Automation: Smart contracts automate tasks, streamlining processes within the decentralized ecosystem.
- Foundation: They not only automate but also enable the existence of various functions, making them essential components.
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How to Analyze Smart Contracts:
- Reading Smart Contracts: Smart contracts can be understood by reading their terms and conditions, similar to traditional contracts.
- Tools: Platforms like Etherscan (for Ethereum-based projects) and GitHub provide insights into a project's smart contract.
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Case Study: Yearn Finance:
- Example Platform: Yearn Finance is used as a case study.
- Etherscan and GitHub: Information about the YFI token's contract, including decimals, governance, and total supply, is found on Etherscan and GitHub.
- Governance Contract: The governance contract is explored further, revealing details about the timelock system.
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Advanced Smart Contract Analysis:
- Extensive Research: The article highlights the importance of continuous research and discovering advanced governance contracts.
- Yearn Protocol GitHub: More in-depth information about smart contracts associated with Yearn Finance is found on their GitHub page.
- Understanding Code: Comments within the code make complex concepts, like automated vault yield strategies, accessible even to those without advanced technical knowledge.
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End Goals of Smart Contract Analysis:
- Crosschecking Development Updates: Users can crosscheck claimed development updates with the actual code to ensure transparency.
- Identifying Clones: Smart contract analysis aids in identifying clones, where new projects copy code from successful platforms.
- Shrimpy's Perspective: While Shrimpy doesn't provide smart contract analysis tools, it offers investment opportunities in popular smart contract ecosystems.
In conclusion, the ability to read and analyze smart contracts is a critical skill for cryptocurrency investors, providing transparency, security, and the ability to make informed investment decisions. The article underscores the practical applications of this skill through a detailed case study and emphasizes its relevance in ensuring the legitimacy of projects in the ever-evolving cryptocurrency landscape.
