Ethereum Smart Contracts — how they work?
7 min readMar 29, 2021


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

Ethereum is a blockchain network aka platform that is control-free and open-source and represents its own cryptocurrency. It authorizes Smart Contracts and Distributed Applications. These are built-in and operate without delays, scam, supervision, or intervention from the external parties.

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

The term simply means a blueprint or transaction protocol that is being exploited on the Ethereum blockchain. It’s a number of codes, namely its actions, and data (its state) that is placed under a specific address on the blockchain.

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

When two people agree on something and do it by means of a code — that’s what a smart contract is. No one can change the code since it is deployed on the blockchain. The contract can be enforced only when certain conditions are followed.

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?

Nick Szabo, a computer scientist, was the pioneer in introducing the concept of smart contracts to the world (now the most influential person in the crypto and tech world). He gave the full definition and the role of these computer programs for financial institutions. Yet, at a time, there was no suitable environment to make the implementation possible.

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

To get you a picture of how the technology works, imagine a vending machine. Nick puts 15 cents in it and then gets his Soda, while Sarah puts a two-dollar bill and gets her Coke and the change back. Thus, the coin-operated machine represents a sort of consent carrier that enables anyone having some funds to take part in an exchange.

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 human factor ruining processes: no need for individual or institutional approval, no third parties as it’s up to the whole network to manage the execution.
  • 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

Smart contracts are subject to implementation in any area of life — financial services, healthcare, insurance — you name it. Let’s regard a few examples.

State institutions

Smart contracts have the potential to create an even more secure voting system thanks to ledger-secured votes that need to be decrypted. Additionally, smart contracts can boost voter turnout, eliminating a clumsy system of filling out questionnaires, proving identity, etc. All voting will happen online.


Blockchain will add to keeping personal health logs encoded, with a unique key providing permission to particular people. It can also store invoices of surgeries and send them directly and by default to insurance agencies as proof-of-delivery. Researches might be conducted strictly by HIPAA laws. Other healthcare processes like drug supervision, test results, and healthcare equipment management can benefit from the use of the ledger.


Not only does blockchain deliver a unique ledger for trust matters, but it also improves drastically socializing at any level and workflow processes thanks to correctness, automation, and clarity. The blockchain ledger accelerates approvals, problem solutions and removes inconsistencies coming from independent processing and bringing about legal problems.

Real Estate

Smart contracts will help make more money by decreasing the costs of intermediaries, such as Craiglist, newspaper ads. etc. Instead, brokers pay with crypto and deploy the contract on the ledger. The network’s members notice it, and the contract gets their automatic execution. Every participant in the business can benefit from this kind of deal.


Smart contracts can help with self-driven vehicles by enabling “oracles” that will identify who did what in a car accident — the driver or the sensor — and many other variables. Insurances can charge differently according to where and under which terms their clients are running their vehicles.

ERC20 Standard

The term stands for Ethereum Request for Comments and was suggested by Fabian Vogelsteller in 2015. It represents a benchmark for fungible tokens that are similar in type and worth. To understand it properly, ERC-20 can render anything that is brought to virtual reality like reputation points, lottery tickets, financial assets. To have an interface for any ERC-20 token, Contract Application Binary needs to be used.