What is an Ethereum Smart Contract?

An explanation about what an Ethereum Smart Contract is and how they are used in the blockchain.

Brittany avatar
Written by Brittany
Updated over a week ago

First, let’s look at what a contract is. A contract generally outlines a relationship between two parties, bound by law. If one party violates that contract, actions can be taken against them for essentially breaking the law. Many beginning users confuse contracts and smart contracts, and while they can hold similar functionality, they are used for different purposes.

A smart contract is a self-executing contract, written in code, the primary purpose of which is to achieve a goal without the interference of a middleman. Smart contracts can be used to exchange money, property, shares, data, or anything of real value while remaining decentralized and transparent. The contract itself regulates what action is taken, based on its code. Smart contracts will always achieve the same end goal, based on what input is being used. While regular contracts are meant to be permanently (or temporarily) binding to the law, smart contracts actually are permanent. They make their own laws with their behavior. Using a smart contract for any other purpose than their primary one is impossible. They are immutable, bound to the Ethereum blockchain and unable to be edited. This may sound a bit complicated or confusing, so let’s view it in a different light.

The original creator of smart contract technology was Nick Szabo. In 1993, he hatched the idea for a system similar to a digital vending machine. A user could input a value or data string, and the digital machine would execute itself based on the input to return a finite item. This is how smart contracts were developed. A simple example of this would be a user sending ETH to their friend but only at a specified time. They could create their own smart contract to send the funds at a later date, deposit their funds, and the smart contract would self-execute to send the funds as specified without any further external input.

The Ethereum blockchain was created specifically to write and execute smart contracts. While Bitcoin technically supported the very basic smart contract of transferring BTC, this is generally regarded as only the tip of the iceberg. With a little innovation and creativity, smart contracts can be built on top of one another to create completely decentralized applications (Dapps) and decentralized autonomous organizations (DAOs). In these cases, each smart contract performs a function, which triggers another function in another contract, which continues to develop until a complicated action is completed without needing any centralized authority to monitor it.

Some generally well-known use cases for smart contracts are:

  • Multi-signature wallets, which require a majority of the wallet’s owners to agree on spending before the contract executes.

  • Managing relationship agreements between two users, i.e. buying insurance or property ownership.

  • Providing information or utility for other contracts to pull from.

  • Storing information, such as personal information, medical data, membership records, consensus ledgers, etc.

The use cases for smart contracts are endless. We are only beginning to scratch the surface of what this technology can offer, and how it will revolutionize the world.

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