How Do Ethereum’s Smart Contracts Work?

Like many other blockchain projects, smart contract has always been a confusing term among users. As a new technology created by blockchains, it contains many confusing concepts. Normal contracts have standards which contain rules for perfoming a transaction. But smart contracts perform transactions using encryption.

To summarize, smart contracts are softwares which are executed exactly the way their developers have specified.

The first idea for smart contracts were mentioned in 1993 by a computer an encryption expert named Nick Sabu for an automatic transaction mechanism. The most famous example for this is a vending machine where you can buy goods by simply inserting money. Likewise, the ethereum users can send 10 ethereums to a friend on a specific date using smart contracts (read our guide on the “story of Ethereum’s creation”).

In this situation, user creates a smart contract and sends the data to that contract so that it can execute a desired command.

Ethereum is a platform created specifically for creating smart contracts. But this new tool (smart contracts) hasn’t been made for a specific work. Its developers believe that smart contracts can even shape the block structures for creating decentralized applications or organizations.

How do smart contracts work?
In the beginning, Bitcoin used smart contracts to send and receive its cryptocurrency from one person to another by allowing network nodes to verify each transaction. But Bitcoin only used this system for cryptocurrency transaction. On the other hand, Ethereum doesn’t have the Bitcoin’s restrictions and allows developers to create different programs using smart contracts.

Smart contracts can:

• create different programs such as joint accounts which works automatically and without any human interference (like giving an amount of assets to the program and only releasing it by the agreement of all members)
• create programs for insurance management
• give service to other programs (for example, how a software library should work)
• act as a depository for information like containing the data of a domain or a folder

Power in numbers:
Smart contract usually complete or assist each other.
For example, a program based on weather conditions can use a contract for acquiring weather conditions while using another contract to define different responses for different weather conditions.

The execution of each contract requires an Ethereum transaction fee which is a small amount. As we said in our guide on “how does Ethereum work?” Ethereum activates the code of a smart contract when a user or another contract pays the fee for that transaction.

After that, the Ethereum’s virtual machine executes that smart contract’s code using “bytecode” and then those contracts can be read in the network.