How Do Ethereum Smart Contracts Work?

On this new educational cryptocurrency article we look at how do ethereum smart contracts work, which are one of the key building blocks to a succesful decentralized exchange...

How Do Ethereum Smart Contracts Work?

Even if you can safely explain terms like wallets, addresses, and coins to your friends - would you be able to describe how do Ethereum smart contracts work?

When it comes to the blockchain industry there seems to be a general bewilderment to describing how do Ethereum smart contracts work - or was that the industry as a whole? I can't remember!

In any case, they are one of the key reasons why decentralized exchanges like Saturn Network are touted as one of the securest places for traders to safely process transactions between ether and their favorite tokens.

For this reason, we thought it would be a good idea to explain exactly what they are and how they work.

When you think of a standard contract it generally outlines terms of a relationship which is enforceable by law. An Ethereum smart contract works with the same purpose, only it is enforced by cryptography code on a public blockchain. In computer terms, you could say they are like tamper proof programs and work only as set up by their creators.

The Ethereum platform is built specifically for easily making smart contracts. For example, you could send 5 ether to your friend on a preset date using this function. Though, they are not just meant to be used to pre-plan simple payments. These tools are Ethereum's ingredients for building decentralized applications known as dApps.

So how exactly do Ethereum smart contracts work?

Bitcoin did support a very basic version, however, the scripting language was simple and restrictive. Ethereum opens the doors for developers to create their own programs.

Developers are able to code their very own smart contracts or as the ethereum whitepaper likes to call them Autonomous Agents. The scripting language provided is referred as Turing Complete meaning it is able to execute any algorithm.

For example, Ethereum smart contracts can complete functions such as:

  • Provide "multi-signature" wallets, transactions are only made if a certain amount of people agree for the funds to be spent.
  • Administrate agreements between different users & enforce them.
  • Be called on by different contracts and provide information(think like software libraries in programming.)
  • Save information about a user application, think like a club membership or domain registration details.

You will find in most cases dApps will rely on multiple smart contracts calling on each other to function correctly. For each smart contract to run correctly, the ether transaction fee has to be covered, this depends on the amount of computational power required.

When the fee is covered, the Ethereum Virtual Machine will make sure the smart contract is executed and interpreted by the network.

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