Blockchain 101: Smart Contracts
7 min read
Table of contents
- What Is A Smart Contract?
- How Does A Smart Contract Work?
- Benefits Of Using Smart Contracts
- Best Practices and Considerations For Smart Contracts
- Real-World Applications of Smart Contracts
Ethereum is a popular blockchain platform for developing and deploying decentralized applications (DApps) and other digital assets.
One of the key features of the Ethereum platform is the ability to create and use smart contracts, which are like automatic, computerized agreements that run on the blockchain.
With a smart contract, you can create and manage digital assets without needing someone to oversee things, making your transactions faster and more efficient. It also reduces the likelihood of fraud.
This article will teach you about Ethereum smart contracts and how they work. You will also discover the benefits of using smart contracts and their potential impact on various industries.
What Is A Smart Contract?
A smart contract is a block of code that automatically executes an agreement. It is stored on a blockchain and runs when certain predefined conditions are met.
Nick Szabo introduced the concept of smart contracts in 1994. Two years later, he expanded on its potential, discussing a future where electronic commerce (e-commerce) protocols can take advantage of “highly-evolved” contract law practices.
With a smart contract, you can automatically complete a deal or transaction without needing a third party, such as a bank or lawyer. As a developer, this enables you to build “decentralized apps” (DApps) that are secure, reliable, and accessible.
Once added to the blockchain, a smart contract generally can’t be reversed or changed. This feature makes it nearly impossible to breach the terms of the agreement or commit fraud.
How Does A Smart Contract Work?
Nick once used a vending machine to illustrate how smart contracts work.
When you want to get a drink, you select it and slot in a specific amount of coins. The vending machine automatically verifies that you’ve put in the correct number of coins, dispenses the drink, and gives you your balance.
There’s no need for a human vendor to be present during this interaction because the computer program in the vending machine handles the entire transaction.
The lock box protects the stored coins from attackers, allowing you to deploy the vending machine wherever possible.
A smart contract works in the same way.
Coding the Smart Contract
On Ethereum, the primary programming language for writing smart contracts is Solidity. There are other programming languages, such as Vyper and Yul, but Solidity is the dominant one.
Depending on the type of smart contract, there are different standards known as Ethereum Request for Comments (ERCs) and Ethereum Improvement Proposals (EIPs) that give guidelines on how to properly write the code for your contract so that it integrates nicely with other DApps.
Deploying the Contract
After writing the smart contract and verifying that it covers all the terms of the agreement, you can deploy the smart contract by sending an Ethereum transaction containing the compiled code without specifying a recipient.
It is essential to double-check your code before deploying because all blockchain transactions are immutable and irreversible.
Deploying the smart contract will also cost some “gas fees”, which are transaction fees paid to network validators working on the blockchain.
Executing the Smart Contract
Now that the contract is on the blockchain, any transaction that requires the smart contract to work will trigger it and get an automatic response. For example, if you wanted to transfer tokens from your wallet to another user’s wallet, the smart contract guiding that transaction in your DApp will execute once it’s called.
Benefits Of Using Smart Contracts
Here are some benefits of implementing smart contracts:
Smart contracts can automate various processes, including transferring assets, executing financial transactions, managing supply chain logistics, and tracking intellectual property rights. They promote autonomy by enabling the automatic execution of pre-determined contract terms.
Smart contracts are stored in a blockchain and distributed across multiple computers in a network. This makes it difficult for a single entity to tamper with its code.
Also, due to its autonomy, there is no need for manual intervention or a third party to enforce the terms of the contract. This helps to reduce fraud and other malicious activity.
By eliminating the need for third parties or manual intervention, smart contracts can save time and reduce the risk of delays.
For example, a smart contract automatically calculates and distributes payment based on predefined terms rather than requiring manual calculations.
Due to the absence of intermediaries, you can save on transaction costs and intermediary fees. Also, by defining the terms of a contract clearly and transparently, smart contracts can reduce the risk of misunderstandings and disagreements, which can save costs by eliminating the need for costly and time-consuming dispute resolution processes.
Best Practices and Considerations For Smart Contracts
Once a smart contract has been deployed on the blockchain, you generally cannot update it. So, if you make any mistakes while creating the contract, it could have profound implications.
Here are some best practices to help you create better smart contracts:
Keep Your Contracts Simple
Clearly define the purpose and function of the contract. Make sure it is easy to understand and serves its intended purpose.
Perform In-depth and Rigorous Testing
It is essential to test your smart contract thoroughly during development to ensure there are no potential loopholes or bugs. This includes testing for the correct execution of all functions and for edge cases and failure conditions.
Update Your Tools
Build in a secure and tested development environment with the latest version of the Solidity compiler. This ensures your contract is compatible with the latest Ethereum Virtual Machine (EVM). Also, use a secure key management system to ensure that only authorized parties can call or modify the contract.
Audit Your Contracts
After creating your smart contract, consider having the contract audited by a third party to identify and fix any potential vulnerabilities.
Implement Security Fixes
To improve the security of your smart contract, implement general practices such as using safe math functions to prevent integer overflow, checks to avoid attacks of reentrancy, and contract patterns such as the “pull over push” payment pattern. Avoid external contract calls when possible, as they can increase the attack surface and make your smart contract more vulnerable to exploits.
Real-World Applications of Smart Contracts
Supply Chain Management
Supply chains may benefit from using a "smart contract" system, in which the delivery of an item can automatically trigger the replenishment or reordering of that item higher up the supply chain, even if multiple companies are involved. This model can minimize the impact of incorrect orders.
Smart contracts have the potential to revolutionize the real estate industry by streamlining the process of documenting property ownership and eliminating the need for brokers or intermediaries. This can increase the speed of transactions and provide greater transparency and cost-effectiveness compared to traditional methods of title management. Smart contracts can store and track important information about a property, such as its history, location, and legal issues, making the transfer process more efficient and cost-effective.
Insurance companies rely on formal agreements with policyholders to provide coverage according to agreed-upon terms. They also need to handle claims resulting from various occurrences or events. Smart contracts can streamline this process, from creating the agreement and issuing it to the policyholder to settling claims if necessary.
Smart contracts help to ensure the safe transfer of patient data between healthcare providers, which is crucial in maintaining the quality of care. One of the key features of smart contracts is the ability to securely store patient data on a blockchain, accessible only through the patient's private key. Healthcare professionals will only have access to the information they need, and patients can feel confident that their data is secure.
Decentralized Finance (DeFi)
Decentralized finance (DeFi) dApps, which rely on blockchain and smart contract technology, offer an alternative to traditional financial services. These dApps provide a range of financial services, including lending, borrowing, and trading, as well as new, decentralized products and business models. DeFi dApps offer greater transparency, 24/7 availability, and reduced costs compared to traditional financial services, making them accessible to a broader range of users.
Smart contracts are valuable in various contexts, including escrow, clinical trials, insurance, and government processes. They are beneficial for providing automation on decentralized platforms and can be implemented using Ethereum or other blockchain technologies.
To learn more about smart contracts, check out the resources below.