How do Ethereum Smart Contracts Work?

Smart Contracts

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Smart contracts are very similar to real world contracts, however, they are kept fully digital, and do not require the intervention of third parties and middlemen to take effect. Absolutely all smart contracts function on an “If”- “Then” basis. Meaning if predetermined input happens or is satisfied, an action will automatically follow.

Smart contracts were designed for the specific purpose of action automation.

Decentralized Contracts

It’s possible to create smart contracts on the Ethereum network, and to pre-program them. Similar to how ICO’s distributed their tokens to individuals who send Ethereum to their addresses.

Smart contract are prepared by Ethereum mineworkers and are coded as standard blocks into the ETH blockchain.

Essentially, the Ethereum Blockchain functions as a decentralized notary, lawyer, or third party. However, the transaction costs are very low and there is no need for someone to get into the contract and physically execute its conditions.


A basic example of a smart contract is a “greeter bot” which responds to all users who send Ether to an address, expecting a reaction of some sort.

How Smart Contracts work:

It’s important to note that bitcoins do not operate as smart contracts. They are simply digital currencies send from one address to another, manually. So, while you could say that bitcoin did support contracts before Ethereum, it was only as a means of value transferring.

Also, while Ethereum gets all of the attention for their platforms smart contracts. They were actually invented by Nick Szabo, way back in 1994.

Smart contracts can also:

  • Operate as multi-sig accounts, releasing funds when the necessary percentage of people agree.
  • Be used to manage and sort agreements between contract users
  • Provide a boost to the utility offered by other contracts.
  • Store pertinent information about applications.

Where can smart contracts be used?

Voting – Ethereum smart contracts can be used for voting, their automatic nature ensures that votes will not be rigged and manipulated. It would be very difficult to interfere with ledger protected votes since you must decode everything and decoding requires absurd amounts of power.

Management systems – especially where certain workflow aspects can be automated, like shipping goods after a payment has been made.

Healthcare – Information about patient’s data can be stored on the Blockchain and accessed on a universal basis. Payment receipts can also be automatically sent to insurance providers using smart contract Blockchain technology.

Other areas where smart contracts can be used include; case history, the automobile industry, and in real estate.

What do Ethereum Smart Contracts offer?

Trust – Information cannot be manipulated by third parties.

Backups – Smart contract data and events are duplicated many times over on pertinent Blockchains.

Saving money – Smart contracts eliminate the need for certain middlemen, greatly reducing transaction costs.

Information safety – Smart contracts are very difficult to breach due to the advanced security measures utilized in their creation.

Accuracy –  Smart contracts are free from human error.

Autonomy – Through smart contracts agreements can be made without the need for lawyers or any intermediaries.

Ethereum smart contracts are quite powerful and are powered by two two factors:

Solidity – A complete programming language developed for Ethereum users.

By turing complete, we mean that it can be used to solve most of the computational problems which include support functions like infinite loops. Solidity is similar to the JavaScript programming language.

Gas – A special unit used in the Ethereum network. It essentially measures how much work is required for an action to be performed. It is pretty much a fee assigned to transactions and smart contracts.