Ethereum Focus: what are blockchain smart contracts and how do they work

By: Obinna Tony

Ethereum Focus: what are blockchain smart contracts and how do they work

August 5, 2022 2:11 PM

Smart contracts are digital contracts stored on a blockchain and are executed automatically when terms and conditions that have been predetermined are met. and  operates by following basic “if/when…then…” statements which are written into a code on a blockchain. In the context of smart contracts, there can be a lot of stipulations that are needed to fulfill the participants that the task will be completed to satisfaction. Smart contracts can be programmed through a developer. Though in many cases, organizations that use blockchain for their business can provide templates, web interfaces and various other online tools to break down structuring smart contracts.


There are various benefits of smart contracts and they range from speed, efficiency and accuracy, trust and transparency, security and savings. Smart Contracts can also be applied to safeguarding the efficacy of medications, increasing trust in retailer-supplier relationships and making international trade faster and more efficient.


As highlighted by Nick Szabo, an American and a computer scientist that devised a virtual currency called “Bit Gold” in 1998, Smart contracts are computerized transaction protocols that can execute the conditions of contracts. Smart contracts can be used to make transactions traceable, transparent and irreversible.



How Do Smart Contracts Operate?


A smart contract is an outlined programme that encodes business logic and works on a dedicated virtual machine which is embedded in a blockchain or other distributed ledger.


In a smart contract, the first step is for business teams to collaborate with developers to define the laid down criteria for the desired behavior of smart contracts in response to certain events or circumstances.


Second step, conditions including authorisation of payment, shipment receipt or a utility meter reading threshold are core examples of simple events.


Step Three: In the case of complex operations like trying to determine the value of a derivative financial instrument, or automatically releasing an insurance payment, might have to be encoded with the use of better and more sophisticated logic.


Step Four: the developer employs a writing platform for smart contracts to create and test the logic. When the application has been written, it is sent to a separate team to test the security.


Step Five: an internal or a company that is specializing in vetting smart contract security can come in handy.


Step Six: once it has been authorized, the contract is then deployed on a blockchain that has been existing or other distributed ledger infrastructure.


Step Seven: the smart contract is configured in a way to listen to updates of an event from an “Oracle.” The Oracle is effectively a cryptographically secure streaming data source once it has been deployed.


Step Eight: Once a necessary combination of events from one or more oracles has been obtained, the smart contracts can be executed successfully.


Blockchain Implementation of a Smart Contract and Crowdfunding


One can use Ethereum-based smart contracts to create digital tokens that can be employed for performing transactions. If you are starting a business that needs funds but are at a crossroads because no one will lend money to someone they don’t know or trust, there are other ways around. Here, smart contracts have important roles to play. By using Ethereum, one can build a smart contract to hold contributors’ funds up to a given date and when one’s goal is met. From the result met, the funds are released to the owner of the contracts and returned to the contributors. There are many issues with the centralized crowdfunding system, especially with the management system. To combat this, Decentralized Autonomous Organization is better utilized for crowdfunding and there are a set of terms and conditions. Every individual that is participating in crowdfunding is given a token and all the contributions are recorded on the blockchain.


There are still some limitations associated with smart contracts. Smart contracts can’t send HTTP queries, so they can’t acquire information about real-world events and this is by its design. Also, using external data on smart contracts could jeopardize consensus. This is very critical for security and decentralization.


Blockchain can be said to be the underlying technology that enables the growth of smart contracts. Smart contracts are quite a great tool in concept but they are not perfect tools. Smart contracts and blockchain networks are programmed by hand, hence they are prone to human error and this could lead to exploits. This was what necessitated the attack on Ethereum’s decentralized autonomous organization in 2016. Hackers were able to exploit the vulnerability in the DAO’s fundraising smart contract and used it to secrete funds from the project.


Smart requirements-powered contracts have been proven to be the way forward for relatively basic contracts that can be written and also executed automatically when pre-conditions are met. This includes residential conveyancing, where completion monies can be given immediately after contracts are signed. Smart contracts are being used by many banking and insurance organizations in their day-to-day operations. Due to this, smart contracts are active and operated in real-world circumstances and in time to come, they will constantly be used in every sector of our lives. Currently, there is still a long way to go before smart contracts take hold of every sector.