How Do Ethereum Smart Contracts Work?

Ethereum Smart Contracts

Undoubtedly Ethereum has made its name in the cryptocurrency world. Even though it has its own cryptocurrency Ether, Ethereum is more than its digital coin. Ethereum works as a decentralized platform for smart contracts. Smart contracts can change the way we conduct business today.

Ethereum: A Brief History

In late 2013, Vitalik Buterin first described the concept of Ethereum to the Bitcoin community. Vitalik’s vision was to take the underlying blockchain technology from Bitcoin and create a programming language that can encode contracts on the blockchain. He wrote a white paper describing the Ethereum protocol and the smart contract architecture.

In early 2014, Vitalik announced Ethereum at the North American Bitcoin Conference in Miami, Florida. By mid-2014, Vitalik worked with Dr. Gavin Wood to produce the Ethereum Yellow Paper that lays the foundation for the Ethereum Virtual Machine (EVM). This paper is the reference point for Ethereum implementation in seven languages – C++, Java, JavaScript, Go, Python, Haskell, and Rust.

In order to support the Ethereum network, the Ethereum Foundation was established in 2014. The foundation is based in Zug, Switzerland. The same year Ethereum distributed its initial coin offering Ether. It raised around $18 million which released around 60 million Ether into the market.

Today Ethereum development is overseen by the non-profit organization ETH DEV. Ethereum has become one of the popular blockchains. More companies are investing in using Ethereum to create various decentralized applications.

Ethereum Smart Contracts: A Simplified Explanation

Since human beings started to trade with each other, trust has played a vital role in the transactions. Human beings initially only traded with people they trusted. However, with the growing need of society, they had to start trusting strangers. Third-party intermediaries started to play a role in ensuring trust in these trades.

Today we live in a large and diverse world. Even though the communication channels have opened up across the globe, the way we build trust has not evolved. Smart contracts provide a way to build a trustless contract.

Ethereum Smart Contracts

When two parties enter a contract, after the fulfilment of the obligations the two parties exchange the value they agreed upon. If a disagreement happens because one of the parties is not adhering to the contract, then a third-party like the government or legal system has to step in to resolve the issue.

The smart contract takes a more programmatic approach to the solution. In a smart contract, the rules of the transaction are programmatically encoded into the blockchain. When the obligations are met, the value transfer happens automatically. It removes the need for legal or governmental oversight.

For example, if company A places an order of thousand shoes to company B, the Ethereum smart contract can include a provision to check for delivery and automatically pay company B. It automates the process, decreases confusion and simplifies transactions.

Benefits of Smart Contracts

Smart contracts provide a number of benefits:

  • Fast, real-time updates: Smart contracts are executed in the code. There is no need for human intervention. It makes the process efficient and fast. You can get almost real-time responses from smart contracts.
  • Accurate: Manual processes are error-prone. The automated execution of smart contracts makes the process less susceptible to errors.
  • Cost Savings: Without the need for human-hours, smart contracts can save a lot of money.
  • Less Prone to Manipulation: Smart contracts run on decentralized networks making it harder to manipulate. There is less chance of fraud.
  • New Possibilities: Smart contracts open up new possibilities of conducting business. You can start trusting people you never met. It opens the door to more global trade.


Smart contracts have far-reaching uses. They can be used to manage identity, facilitate financial trades, automate mortgages, record land titles, improve insurance, and track supply-chains. However, even though blockchains are secure, smart contracts are not. A human mistake in smart contract led to $60-million heist in 2016. So it’s important to understand the process thoroughly before implementing smart contract solutions for your business.

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