Smart contracts in Ethereum: A beginner's guide

Smart contracts have become a pillar of the Ethereum network, enabling the automation and enforcement of agreements without the need for intermediaries. This post explores what smart contracts are, how they work in the Ethereum ecosystem, and their applications.

What are smart contracts?

Smart contracts are self-executing contracts where the terms of the agreement are directly written into code. Once predefined conditions are met, these contracts automatically enforce and execute the terms. As a consequence, there is no need for a trusted third party. Although this concept is not new, it was first proposed by cryptographer Nick Szabo in the 1990s, it has gained popularity with the rise of blockchain technology, particularly Ethereum.

While Bitcoin is the pioneer of blockchain technology, Ethereum expanded its possibilities by incorporating a programming language that allows for the creation of complex smart contracts. This feature enables developers to build decentralized applications (dApps) that can run on the Ethereum network.

Ethereum’s blockchain serves as a decentralized platform that supports these dApps, with smart contracts forming the backbone of their functionality. The Ethereum Virtual Machine (EVM) executes these smart contracts, ensuring that they operate as intended across the distributed network.

How do smart contracts work?

Smart contracts in Ethereum operate through a series of steps:

1. Writing the contract: Developers write the smart ccontract’s code in a programming language like Solidity. The code sets the rules and conditions of the contract.
2. Deploying the contract: Once written, the smart contract is deployed to the Ethereum blockchain. This process requires paying a fee, known as gas, to compensate for the computational resources required.
3. Executing the contract: When the predefined conditions are met, the smart contract executes the terms automatically. This could involve transferring funds, updating records, or any other programmed action. The execution is irreversible and transparent.

Pros of smart contracts

Smart contracts offer many advantages over traditional contracts:

• Trustless execution: Parties do not need to trust each other or intermediaries. The blockchain ensures that the contract executes as written.
• Transparency: The code remains public on the blockchain and the contract’s execution is visible to all participants.
• Security: Strong security against tampering and fraud is backed by blockchain’s cryptographic technology.
• Cost reduction and speed: The lack of intermediaries reduces the cost. Also, automated execution reduces the time associated with manual processes.
• Accuracy: Eliminates human error by precisely following the coded instructions.

Cons of smart contracts

Smart contracts offer many benefits; however, they face some challenges:

• Complexity: Writing and understanding smart contract code requires specialized knowledge. A robust code is needed in order to have a secure smart contract. Otherwise, errors in the code can lead to significant losses, such as the DAO downfall in 2016 .
• Immutability: While immutability ensures security, it also means that once the contract is deployed on the blockchain, any bugs or vulnerabilities in the contract can’t be easily fixed.
• Legal and regulatory issues: The legal status of smart contracts remains uncertain in some jurisdictions.
• Scalability: Ethereum’s network can become congested, leading to high transaction fees and slower execution times.

Field of applications

Smart contracts can be implemented in various industries:

• Finance: Decentralized Finance (DeFi) platforms use smart contracts for lending, borrowing, and trading without intermediaries.
• Supply chain: This Ethereum tool can track goods from production to delivery. This enhances transparency and reduces fraud.
• Healthcare: Managing patient records and ensuring data privacy can be achieved thanks to smart contracts.
• Insurance: Smart contracts can automate claim processing, ensuring timely and transparent payouts.