What Are Ethereum Smart Contracts?

Ethereum Smart Contracts

What Are Ethereum Smart Contracts?

Let’s be honest: blockchain technology isn’t accessible to wrap your head around. Unless you’re a cryptography expert or software developer, the concept of smart contracts can be deceptive. The term invokes thoughts of legally binding contracts between two parties. Although smart contracts can be used for that exact purpose, it’s not where the name originates from. Nor is it all that smart contracts are intended to do. 

Smart contracts use cryptographic code to enforce a relationship between two parties. These parties do not have to be individual persons or institutions, either. The relationship imposed by a smart contract can be between an application and a network. In other words, smart contracts are self-executing commands that can be programmed to trigger under specific circumstances. Put differently, if X happens, then Y will occur as a consequence.

How do smart contracts work?

Smart contracts have been compared to vending machines, given their if/then functionality. Vending machines work by only giving you the item you selected once you’ve put a specific number of coins. Similarly, smart contracts will only self-execute their programmed command once a particular condition has been met (such as putting in a coin).

In the context of Ethereum, smart contracts can be deployed for any number of purposes. Say, for example, you want to send Ether tokens to a friend on a specific date. The smart contract will ensure that your Ether is transferred automatically once that specific date arrives. The method can also be used as a substitute for actual legal contracts. Say you want to sell an item from a buyer at a specific price. The smart contract will ensure that the item is only dispatched once the seller has paid the agreed amount.

Ethereum Smart Contracts

Smart contracts then and now

Smart contracts were first conceived in 1993, and the Bitcoin network does indeed use a form of this technology. A transaction between two parties will only be completed once certain conditions are met. Bitcoin, however, is limited to financial transactions. Ethereum, on the other hand, is a platform specifically built to create smart contracts. In addition to facilitating the example described above, smart contracts also form the foundation of decentralized apps (also known as dapps).

Ethereum has removed and replaced a lot of the coding that restricts Bitcoin to financial transactions. This improved programming language allows developers to use smart contracts to create dapps for the Ethereum platform. The added flexibility allows smart contracts to do the following:

  • Manage business relationships between two parties like a contract
  • Store information such as app- or personal details
  • Work as a software library to store and deploy multiple software apps
  • Create contracts that require multiple people to sign to be valid

Ethereum Smart Contracts

How smart contracts work together

The best part about smart contract technology is that they can work together. Thus, if a condition required to execute one smart contract is met, that smart contract might create another state that triggers another smart contract. This way, developers can create a long chain-reaction of smart contracts. Of course, using smart contracts is not free. They require processing power like everything else on a network. That processing power is measured in GAS and paid for by Ether tokens.

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