An Ethereum smart contract is considered by many to be the best smart contract available but why is that? Why is Ethereum’s Network considered the greatest? and what exactly is a smart contract and what is the benefit of using one? This beginner’s guide to Ethereum smart contracts will answer all of these questions for a better understanding of this highly misunderstood topic. Let’s start with the basics.
What is an Ethereum smart contract?
A smart contract is similar to a regular, run-of-the-mill contract that you might receive from a lawyer or broker – your typical ‘standard contract’. Well, a smart contract is the same in its form, composition, agreement, everything – but it has one vital difference – it is digital.
A smart contract binds the relationship between the contract parties with a cryptographic code, whereas a standard contract merely outlines the terms of that relationship in a way that is enforced by law.
Smart contracts are meant to be a way to exchange money, shares, or really anything of value, in a conflict-free environment without the need for a middleman.Smart contracts are designed to carry out the exact tasks given by the original makers, or, to execute exactly as directed by the creator of the smart contract.
The idea behind the smart contract (first thought up by cryptographer and computer scientist Nick Szabo in 1993) is that it works like a digital vending machine. Digital currency can be dropped in, digitally tracked and transferred, and the result is whatever was originally agreed on by the parties when they created the smart contract. Out pops that result like a snack would from a vending machine after inserting money.
Most of the time, smart contracts work in tandem with each other, with each additional related smart contract helping to complete the first one.
What is the benefit of a smart contract?
Smart contracts are considered to be much more efficient than a regular contract and as such there are many benefits to using one instead of a standard contract. Let’s list them:
- They are digital: No need for reams of paper and faster accessibility, shareability to the contract.
- They are more Autonomous: cutting out the middleman (and the subsequent back and forth that that entails), making things easier for all parties involved. The originator of the contract is the primary executor of the agreement. This eliminates the risk of error, or even corruption, from a third party.
- Trust: The digital format means that the information of the smart contract is encrypted. The encrypted data is stored on a shared ledger (shared between the parties only) and it will always be there and be accessible; therefore, it can’t be lost or ever off limits to you and all data is constantly backed up, as it is updated.
- Safety: Because all of the data of the contract is encrypted (ie. not stored in its original format, and unlockable only with the right key), the skills needed to hack into the system and discover what the data holds is incredibly high and extremely rare. Smart contracts are not easily decrypted and so they are incredibly safe.
- Speed: The digitization of a smart contract also makes it faster. No paper is required and it doesn’t need to be manually constructed. The program does it all.
- Cost effective: With more speed comes more saving; less time and therefore less money is needed to spend on smart contracts. Also, say goodbye to any lawyer or third party fees.
What can a smart contract do?
The fundamental use is to manage agreements between parties. They act as ‘multi-signature’ accounts, meaning that funds will only be spent if the required percentage of people agree. Smart contracts can work in tandem together to build on each other and verify each other and can also be used to store information about an application, such as domain registration information.
What’s the connection to Ethereum?
Smart contracts can be encoded on any blockchain, but Ethereum’s platform was built specifically to create smart contracts. The Ethereum platform was designed in a way that would give developers the ability to write their own programs and build their own smart contracts. There is a far broader range of computational instructions within the Ethereum platform, than in, for example, Bitcoin, which is what allows this to be possible.
Bitcoin is limited in its ability to process documents. Ethereum, on the other hand, allows for complete freedom in terms of the coding and implementation of smart contracts.
Because Ethereum does allow developers to program their own smart contracts, the developers are referred to as ‘autonomous agents’ – they control the smart contract completely. Smart contracts are also automatic on Ethereum. Ethereum will run a smart contract code when a user (or another contract) sends it a message with enough transaction fees.
As an example, a person using Ethereum could send 10 ether to somebody else through the use of a smart contract. They would do this by creating a contract and placing the data which is coded for this transaction into the contract itself. The smart contract would then be able to execute the desired command once the 10 ether has been given by the creator of the smart contract.
The Ethereum smart contract tools which are built into the Ethereum platform are not intended to be used in isolation. The intent is that they can provide the base for any decentralized application, or even for whole decentralized autonomous companies.
When multiple smart contracts are running together, ether transactions will be required for each. How much the fee is will depend entirely on how much computational power is required to run the smart contract.
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