Smart contracts sound more complex than they really are. And in this article (Smart Contracts 101) you’ll learn exactly what a smart contract is, why they’re so useful and how they work.
Sure, the coding might have a bit of a learning curve. But, understanding smart contracts from a high level standing is simple.
And, once you understand what they are, you’ll see why they’re so valuable.
What is a Smart Contract?
Lets breakdown what a smart contract is into it’s smallest components.
- Smart contracts are code
- Smark contracts are blockchain-specific
- Smart contracts are verifiable & auditable
A smart contract is a piece of executable code that’s stored a blockchain. The blockchain must be able to execute smart-contracts for the process to work.
You can’t, for example, execute Smart Contracts on the Bitcoin network, but you can on networks that run what is commonly called ‘Blockchain 2.0’ architectures. These networks are super-computers, like Ethereum is.
Verifiable and auditable
They reason why they’re so valuable to us is that they’re verifiable, and guaranteed to execute. They are impossible to alter, because you can not edit the blockchain. It is immutable.
What are Smart Contracts used for?
How do Smart Contracts work?
- Smart contracts are programs.
- Smart contracts are then interacted with like any other program is.
- Smart contracts incur fees to deploy and use
Smart contracts are programs
We touched on this a little earlier. Smart contracts are code that is written, stored, and executed on and by a Blockchain.
Smart contracts are effectively programs. And can be used to build dApps — decentralized applications. They’re like any other computer application, it could be a website, a calculator, or an entire financial exchange.
Smart contracts are interacted with
The Smart Contract code can then be interacted with to perform different tasks.
For example, you could have a smart contract that would ‘capitalize’ your name when you interacted with it by inputting ‘your name’. Or, you could make it return a message, "Hello World." if you felt the need to.
Anything that is computable is possible. Web applications, database storage, file storage and transfers, entire cryptocurrency exchanges have been built on smart contracts.
Smart contract fees
Smart Contracts incur fees. The most common reasons for them incurring fees are:
- It costs to put the smart contract on the blockchain.
- There are fees involved in the computation power required to operate the smart contract.
Ethereum smart contract fees explained
Lets take Ethereum, for example. If you’ve not read the Ethereum 101, I suggest doing it now.
Ethereum is a proof-of-work currently, it requires mining, like Bitcoin does. To process transactions on the Ethereum network, someone must operate a mining rig (a powerful machine that cracks algorithmic problems). This mining is incentivised with Ethereum rewards and transaction fees. If there is no miner, the transaction doesn’t get processed.
Putting a smart contract on Ethereum, is effectively "a transaction". The code is processed and stored on Ethereum by a miner.
Later, when someone interacts with a smart contract that has been put on Ethereum, this process will also incur fees. Because the process will be executed by a miner. And every operation required to execute the smart contract code, costs.
Which, for example, is why Uniswap fees are so high. Because the Uniswap Smart Contract has multiple operations.
If you’re not familiar with Uniswap, it is a decentralized exchange the runs on Ethereum. People use Uniswap to trade Ethereum tokens with one another. Its reknowned for it’s high fees. But not because Uniswap is expensive.
The fees incurred by interacting with Ethereum smart contracts are costly because of the price of Ethereum. The gas (fee) required to transact and interact with smart contracts — which perform many transactional operations, of which, there are multiple — is high.
Cheaper smart contract fees
On a positive note, Ethereum is moving towards a proof of stake model, which, is far less costly, and hipefully more beneficial for it’s users and smart contracts.
There are however many many many more Blockchain networks that support smart contracts. Which, are far cheaper to use than Ethereum. And, in some ways, more accessible. For example Binance Smart Chain, Avalanche, Tron, NEO, Solana, Cardano (soon), all of which are very popular and under-utilized.
Smart Contracts 101 Summary
- Smart contracts are code
- Smart contracts are stored on the blockchain
- Smart contracts are verifiable and auditable
- Smart contracts incur fees for the deployer and the user
- Smart contracts are blockchain specific
- Smart contracts are immutable and cannot be changed
I hope you’ve enjoyed learning more about smart contracts. If you’re looking for more content, I’d suggest you start on the Crypto Trading content, and learn how to start trading cryptocurrencies. (Now that you’re armed with the basics.)