Understanding Ethereum Smart Contracts: A Practical Guide
Written by  Daisie Team
Published on 9 min read


  1. What are Ethereum Smart Contracts?
  2. How do Smart Contracts work?
  3. Smart Contract Code
  4. How to create a Smart Contract
  5. Smart Contract Security
  6. Examples of Smart Contracts
  7. Benefits of Smart Contracts
  8. Limitations and Risks of Smart Contracts
  9. Future of Smart Contracts

If you've ever wished for a straightforward guide to understanding ethereum smart contracts, you're in the right place. Making sense of these intricate pieces of blockchain technology can feel like trying to solve a Rubik's cube in the dark. But don't worry, we're going to shine a light on it all and break it down into bite-sized, easy-to-digest chunks. Let's dive in, shall we?

What are Ethereum Smart Contracts?

First things first: what in the world are ethereum smart contracts? If you're picturing a paper contract but, you know, smarter, you're not too far off. Ethereum smart contracts are self-executing contracts. They're like digital handshakes — the agreement and the action all bundled into one. These contracts are stored on the Ethereum blockchain, a public ledger that's kind of like the yellow pages for all transactions.

How are these contracts smart, you ask? Well, they have the terms of the agreement directly written into code. This means they automatically execute when certain conditions are met. No need for a middleman, no room for misinterpretation. It's as if you're buying a candy bar from a vending machine: you put in the money, select the candy bar you want, and voila! The machine automatically gives you your treat.

Here's an example: Let's say Alice wants to sell her car to Bob. They agree on a price, and Bob sends the money to a smart contract. Once the contract verifies the payment, it automatically transfers the ownership of the car to Bob. Alice can't run off with the money without handing over the car, and Bob can't drive away without paying. It's a win-win, and it's all thanks to ethereum smart contracts.

So, that's the basic idea. But, as with anything worth understanding, there's more to ethereum smart contracts than meets the eye. So let's pop the hood and see what makes these contracts tick.

How do Smart Contracts work?

Now that we've covered the basics of what ethereum smart contracts are, let's talk about how they work. The process is as straightforward as making a sandwich, but with much higher stakes. So let's break it down:

  1. First, we have the ingredients. These are the terms of the agreement, which are coded directly into the contract. Just like in our sandwich, the ingredients determine what the end product will look like. No lettuce? No crunch in your sandwich.
  2. Next, the smart contract is deployed onto the Ethereum blockchain. This is like putting your sandwich in the fridge. From that moment on, it's stored and can't be changed. No adding extra cheese after the fact!
  3. Now, the magic happens. When the conditions specified in the contract are met, the contract executes automatically. That's like your sandwich magically making itself when you're hungry. No manual intervention needed, no room for error.

But wait, there's more! Smart contracts also involve something called "gas". This isn't the kind of gas that powers your car, but it does power the execution of the smart contract. In Ethereum, gas is a measure of computational effort. It's like the energy needed to make your sandwich: the more complex the sandwich, the more energy you need.

So, in a nutshell, that's how ethereum smart contracts work. They're like automated sandwich makers, taking care of the details so you don't have to. And best of all, once they're set up, they run smoothly, just like a well-oiled machine—or a well-stocked kitchen.

Smart Contract Code

Let's take our understanding of ethereum smart contracts a step further by diving into the smart contract code. This might sound a bit technical, but don't worry. I'll explain it in a way that's as easy to grasp as understanding a recipe.

Smart contracts are written in a programming language called Solidity. If you've ever seen a recipe for cookies, Solidity is like the list of ingredients and the cooking instructions combined. It tells the smart contract what to do and how to do it.

Here's a simple example of what a smart contract code might look like:

contract SimpleStorage {    uint storedData;    function set(uint x) public {        storedData = x;    }    function get() public view returns (uint) {        return storedData;    }}

Just like a recipe, this contract has different parts. The 'set' function is like the cooking instructions, and 'get' is like the final result—your freshly baked cookies, ready to enjoy. The 'storedData' is the ingredient—say, the amount of chocolate chips you want in your cookies.

But remember, once the smart contract is deployed on the Ethereum blockchain, it cannot be changed. So, it's like baking cookies and not being able to alter the recipe once they're in the oven. You have to make sure you get it right the first time. If you mess up the measurements, you can't fix it later. Hence, writing smart contract code requires precision and careful testing.

So there you have it: smart contract code, explained in a nutshell—or a cookie, if you prefer.

How to Create a Smart Contract

Now that we've mastered understanding ethereum smart contracts' code, let's move on to actually creating one. And no, it's not as hard as you might think—it's just like assembling a piece of furniture with a set of instructions. Let's get started.

Step one: Choose your tools. The most common tool for creating Ethereum Smart Contracts is a platform called Remix. It's like the toolkit you'd use to build your furniture, filled with all the necessary equipment.

Step two: Write your contract in Solidity. This is the equivalent of making sense of those pesky furniture instructions. Remember the code I showed you earlier? That's your guide. Just like how you'd follow the steps to assemble a chair or table, you'll use the Solidity code to build your smart contract.

Step three: Compile your contract. This is just a fancy way of saying put all the parts together. With furniture, you'd screw, hammer, and snap pieces into place. With smart contracts, the Remix platform does the "assembly" for you.

Step four: Deploy your contract to the Ethereum network. It's the final step, like admiring your newly built piece of furniture. But instead of sitting on a chair, you're sending your newly minted smart contract onto the Ethereum network for others to interact with.

And there you have it! You've just created your first smart contract. It might seem a bit complex at first, just like your first time assembling a piece of furniture. But with practice, understanding ethereum smart contracts and creating them will feel just as satisfying as seeing the chair you've just built from a bunch of pieces.

Smart Contract Security

Let's shift gears a bit and talk about the security of Ethereum smart contracts. It's like considering whether your newly assembled chair will collapse under weight or not. You wouldn't want all your hard work to crumble, right? So, let's ensure your smart contract stands strong.

First, you must audit your contract. Auditing a smart contract is like checking every bolt, screw, and joint of your assembled chair. You need to make sure that everything fits perfectly and there are no loose ends that might cause a problem in the future.

Second, ensure your contract is resistant to common attacks. In the world of Ethereum smart contracts, there are certain types of attacks that hackers often use, like the re-entrancy attack. Ensuring your contract is resistant to these is like making sure your chair won't collapse if someone a bit heavier sits on it.

Third, make sure to keep your contract up-to-date. This is like maintaining your chair, tightening screws when needed, and replacing any worn-out parts. With smart contracts, you need to keep up with the latest security practices and update your contract accordingly.

Finally, consider a bug bounty. This is like asking your friends to try and break the chair you built. If they can break it, you know where the weak points are. With Ethereum smart contracts, offering a bug bounty encourages hackers to find vulnerabilities, which you can then fix before they're exploited.

So, understanding ethereum smart contracts also means understanding how to keep them secure. After all, a smart contract is only as good as its security!

Examples of Smart Contracts

Now that we've covered some of the basics and security considerations, let's look at some real-world examples of Ethereum smart contracts. It's like finally seeing that chair we've been assembling in action!

For starters, there's a type of smart contract called a MultiSig Wallet. This is like a joint bank account where more than one person has control over the funds. In this case, a certain number of people must agree before any funds can be moved. It's like needing two keys to open a box. It's a great way to manage shared funds!

Next, we have Decentralized Exchanges, or DEXes for short. These are platforms where you can trade cryptocurrency directly with others, without needing a middleman. The smart contract acts as the trusty referee, making sure everyone plays fair. It's like trading baseball cards in the playground, but instead of a teacher overseeing, it's the smart contract.

Another example is Initial Coin Offerings, or ICOs. These are like fundraisers, but instead of selling cookies or car washes, you're selling new cryptocurrencies. The smart contract manages the sale, ensuring that everyone gets their fair share.

Finally, there are Decentralized Autonomous Organizations, or DAOs. These are like companies run by smart contracts. The rules of the company are written into the contract, and everything operates based on those rules. It's like a robot boss!

These examples should give you a better idea of the many ways Ethereum smart contracts can be used. It's like understanding that the chair you've built can be used not just for sitting, but for standing on to change a light bulb, or as a makeshift table, or even a decorative piece. The possibilities are endless!

Benefits of Smart Contracts

Now that we've seen some examples of Ethereum smart contracts in action, let's talk about their benefits. It's like discussing why that chair you built is better than a regular one.

Firstly, smart contracts are trustless. You don't need to trust the person you're dealing with or a third party. The smart contract takes care of everything. It's like having a super-efficient personal assistant who never makes mistakes.

Secondly, transactions happen directly between parties. No middlemen means no extra costs or time delays. It's like being able to walk straight up to the front of the line.

Another major benefit is security. Smart contracts are stored on the blockchain, which is very secure. It's like storing your chair in a bank vault instead of just leaving it in your front yard.

One of the most interesting benefits is automation. Once the conditions in the contract are met, the contract executes itself. Imagine if that chair you built could assemble itself. Pretty cool, right?

Finally, smart contracts offer transparency. All transactions are visible to all parties involved. It's like having a glass chair – you can see everything!

Clearly, understanding Ethereum smart contracts and their benefits is like discovering a whole new way of doing things. It's a big step forward in the world of cryptocurrency and blockchain technology.

Limitations and Risks of Smart Contracts

While understanding Ethereum smart contracts is like unlocking a treasure chest of benefits, it's only fair we also discuss the limitations and risks. Just like a coin has two sides, so does the world of smart contracts.

Firstly, smart contracts are immutable. Once you've created a contract, you can't change it. It's like writing a message in wet cement. Once it dries, it's there forever. This could be a problem if you make a mistake or if conditions change.

Secondly, smart contracts are only as good as their code. A badly written contract can lead to unexpected outcomes. It's similar to following a recipe – if the recipe is wrong, your cake could end up a disaster.

Another potential risk is the lack of legal framework. The legality of smart contracts is still unclear in many places. It's like exploring uncharted territory. You might discover gold, or you might stumble upon a bear.

Finally, there's the issue of privacy. Ethereum smart contracts are transparent, which is great for trust but not so great if you value your privacy. It's like living in a house with glass walls. Sure, it looks cool, but everyone can see what you're doing.

Understanding Ethereum smart contracts is a journey, and like all journeys, there are risks along the way. But with knowledge and caution, you can navigate these waters successfully.

Future of Smart Contracts

As we move forward in understanding Ethereum smart contracts, it's exciting to imagine what the future holds. Just like the internet revolutionized communication, smart contracts have the potential to change how we conduct business and transactions.

One of the most exciting prospects is greater automation. Imagine a world where routine tasks are automatically handled by smart contracts. It's like having a robot butler, except it's invisible and lives in the ether of the internet.

Another promising development is in the realm of legal proceedings. Smart contracts could make legal agreements more efficient and less prone to human error. Imagine a world where court cases don't drag on for years because a smart contract can instantly verify all the facts.

We can also expect to see more integration with other technologies. Just like peanut butter and jelly, some things are better together. Smart contracts could be combined with other innovations such as Internet of Things (IoT) devices, creating a world where your fridge orders milk when you're running low or your car pays for parking automatically.

Finally, as understanding Ethereum smart contracts becomes more widespread, we can expect greater acceptance and adoption. It's like when smartphones first appeared – at first, only a few people had them, but now it's strange if you don't.

So as we look to the future, the potential of smart contracts is vast. It's an exciting time to be part of this digital revolution.

If you're intrigued by Ethereum Smart Contracts and want to dive deeper into the world of web3 technology, check out the workshop 'Start Your web3 Journey' by Tom Glendinning. This workshop will provide you with a comprehensive understanding of the web3 ecosystem and help you kickstart your journey in the exciting world of blockchain and decentralized applications.