Ethereum Smart Contracts — how they work?

Victor Hugo said: “There’s nothing more powerful than an idea whose time has come”. It looks like he predicted Smart Contracts because they did really change our life for good. To illustrate, now John and Ann do not have to turn to third-party services like banks, government institutions to have a buy-and-sell deal between them. It’s just two of them and transparent technology enabling this process.

So, what do we know about smart contracts? Who’s the creator? How can you apply them? What’s more important, how can you benefit from them? You’ll find all the answers here and even more. But first, let’s get to know more about the Ethereum blockchain, which “mothered” smart contracts, and the very idea of decentralization. Take a look!

Ethereum Ecosystem and Decentralized Exchanges

Applications circulating on this platform work on a particular cryptographic token — ether. It’s the Ethereum’s driving force and is mainly in demand by developers who strive to create and manage applications within the network. The launch of Ether had two purposes — trading as a virtual currency exchange like Ripple, for example, and managing applications and cashing in the activities.

In 2016, 2 blockchains originated from Ethereum as a result of a 50 million theft. These were Ethereum and Ethereum Classic. The novel one was a hard fork from the initial software designed to prevent any malware attacks.

For now, it’s the second-largest digital currency on the market, giving place to Bitcoin.

As for decentralized exchanges, they represent moderators that help buyers and sellers interact without middleman fees. The participants do not share their data with third parties. The concept of decentralization makes trading volume and price manipulation impossible and allows users to stay anonymous.

Smart Contract ABC

Smart Contracts are a kind of Ethereum back office, meaning they possess a deposit and can carry out operations across the network. Herewith, any user controls it, and they are exploited on the network and operate according to the program. Other accounts can later work with a smart contract by providing transactions that act as anticipated on the smart contract. Smart Contracts can suggest guidelines like a traditional one, and in default apply them with the code.

One can compare a smart contract with a candy machine. When putting in the precise fund, the precise output comes out. For example, you put money to get a chocolate bar, pick it first, and in seconds the bar is dispenced. This principle is built into the candy machine. A smart contract has its logic integrated into it as well. Just like coin-operated machines do not require vendor employees, many industries won’t need intermediaries thanks to smart contracts.

Anyone can create a smart contract and forward it to the ecosystem of users. The latter are required to know how to code in a needed language and possess enough ETH to push forward a contract. Procedurally, managing a smart contract is a transaction, meaning one needs to pay their Gas in the same manner they have to pay gas for an ordinary ETH transfer. But in this case, expenses are bigger.

Finally, as for the basics, these transaction protocols might be considered as open APIs since they are public on Ethereum. It allows appealing to other ones in your own smart contract to get more opportunities. Contracts might even produce other ones.

The real purpose of using the technology

Here’s a great example to illustrate the term. Tom is willing to buy Ann’s house. Their settlement comes as a smart contract. If Tom pays Ann 5,000 ETH, the house becomes his property. When this agreement is deployed on the blockchain, no one won’t be able to modify it. This smart contract will be immediately fulfilled once Tom pays Ann for the property.

Hadn’t they a smart contract, they will go for the services of banks, government institutions, etc. On the contrary, blockchain turns smart contracts into an amazing idea. It can be utilized in any sphere of life. As blockchain is control-free and represents a shared database, no one is able to control it. Smart contracts are like a bridge for industries and blockchain. Any domain can benefit from it: government, supply chains, healthcare, automotive, real estate.

What about the creator and target audience?

Although blockchain technology was not even known at a time, he explained the entire mechanism in his book. Then, when the first blockchain was created in 2009, smart contracts irrevocably found their appropriate environment. Now, people can use cryptocurrency wallets and exchanges without actually seeing the technology but benefit from it. Blockchain saves transactions and processes them.

What’s good about it is that it saves tons of time and removes middlemen from the equation and thus possible conflicts between them. Users can exchange real estate, money, anything valuable in a hassle-free way and without collision of interests. As mentioned above, it can be applied to any industry — insurance, credit approval, breach contracts, real estate law, etc.

The very essence of the technology’s work

In a blockchain, the user provides a needed amount of digital money to a smart contract, thus the wanted component arrives at his or her account. To get a smart contract completed, the user can indicate conditions, rules, any other detail to be followed.

Now, what about functionality?

  1. It’s subject to being approved by many. The funds are spent only when the needed percentage of users agree on that.
  2. It can give rise to other contracts. Smart contracts can be interrelated, meaning if one ends, the next one begins.
  3. It keeps data on applications.

To make it work, the user needs to script a code and possess ETH coins to give effect to a contract. From the technical point of view, its deployment constitutes the Ethereum transaction. The sender pays a fee in Gas, which is usually higher than the one of an ordinary transaction.

Benefits that smart contracts stand out for

  • No trustworthiness problems as the logs are encrypted on a collective ledger. In no way any user can say they are just gone.
  • No savings lost as it might happen in a regular bank. On Ethereum, users are there for you. The documents are “cloned” a lot of times over and over again.
  • No hacking threats as cryptography, encryption make documents secure.
  • No tons of time to deal with documents as these programs exploit software code to make processes automatic.
  • No filling out piles of docs and applications, which provides greater accuracy

Smart Contract Implementation in Real Life

State institutions



Real Estate


ERC20 Standard

Anonymous Crypto Exchange Without Limits