SBM

An Overview of Smart Contracts on Ethereum

Oluwakayode Samuel Adeyemi's photo
Oluwakayode Samuel Adeyemi
·

2 min read

Table of contents

No heading

No headings in the article.

Introduction:
Smart contracts are automated programs that run on the Ethereum blockchain, automatically enforcing the terms of an agreement. They remove the need for intermediaries, providing transparency, security, and efficiency. These contracts are foundational to decentralized applications (DApps) and have been revolutionizing sectors like finance, supply chain management, and real estate.

How Smart Contracts Work:

  1. Code Deployment:
    Smart contracts are written primarily in Solidity, a high-level programming language that’s designed for Ethereum. Once code is written, the contract is compiled into bytecode and deployed on the Ethereum Virtual Machine (EVM). This will ensure that every node in the Ethereum network can execute or run the contract identically.

  2. Immutable and Decentralized:
    Once deployed, smart contracts are immutable, that is, they cannot be altered. This immutability, combined with decentralized execution, creates trust because no single party can manipulate the contract’s outcome.

  3. Trigger Mechanism:
    Smart contracts are executed when some specific conditions that are defined in their code are met. For instance, a contract may automatically release funds when a product is delivered. These conditions rely on inputs like transactions or oracles, which bring off-chain data onto the blockchain.

  4. Gas Fees:
    Every operation in a smart contract requires computational resources. Ethereum charges gas fees (paid in ETH) to compensate miners for executing these operations. Complex contracts with many steps consume more gas.

Example Use Case:
Consider a decentralized lending platform. A borrower deposits collateral and requests a loan through a smart contract. If they fail to repay on time, the contract automatically liquidates the collateral to repay the lender—without involving a bank or legal process.

Benefits:

  • Trustless: No need to trust a third party; the blockchain verifies everything.

  • Transparent: The code is publicly accessible and auditable.

  • Cost-Effective: Reduces intermediary fees.

Challenges:

  • Security Risks: Bugs in the code can lead to significant losses (e.g., the DAO hack).

  • Scalability: The Ethereum network can become congested, leading to high gas fees.

Conclusion:
Smart contracts are a groundbreaking innovation in blockchain technology, enabling automated, transparent, and secure transactions. As Ethereum continues to evolve, particularly with upgrades like Ethereum 2.0, smart contracts will play an increasingly critical role in building decentralized systems.