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Ethereum Smart Contract – Explained

Ethereum has a worldwide appeal because it has successfully revolutionized the crypto space. Prior to the creation of Ethereum, most people only saw cryptocurrency as a tool to move money across the border or as a store of value where they could make more money simply by HODL-ing. The creation of Ethereum has successfully changed this classic narrative. 

These days, there are people out there who use the Ethereum blockchain to create dApps or to simply store information. All of these became possible thanks to Ethereum’s native capability to support smart contracts. So, what is a smart contract, and what are its use cases?

Ethereum Smart Contract And EVM

As a decentralized public computer, Ethereum utilizes a decentralized virtual machine – which is called the Ethereum Virtual Machine (also known as EVM). The EVM is the virtual machine that can execute scripts by utilizing an international network of public nodes. Unlike the Bitcoin script, the EVM is Turing-complete.

In order to fight spam and to allocate monetary resources on the Ethereum Network, EVM utilizes a mechanism that always requires “gas” for every interaction. The “gas” in Ethereum will always be paid by ETH or Ether (the native cryptocurrency of Ethereum blockchain).

So, what is an Ethereum smart contract? Basically, smart contracts are applications that operate on top of EVM. They are called smart contracts because you can write “contract,” which will be automatically accomplished as soon as the conditions meet the requirements written in the contract itself.

To show you how a smart contract works, let’s use a basic example. Let’s say John wants to make a bet with Alice. But, they don’t trust each other, nor do they trust any centralized gambling platform. They rather trust a “smart contract” on Ethereum. They want to bet that it will be either “red ball” or “black ball” that will show up next in this simple Ethereum-based game. 

When both Alice and John put their crypto money into the smart contract, either party wouldn’t be able to “cancel” the bet, and no centralized casino platform would be able to cancel the bet either. The game would go on, whatever happens, and John or Alice would be able to take the opposite party’s money from the smart contract after the same game shows up the ball colour.

Above is the basic example or use case of a smart contract. The reason why smart contracts are so appealing is that they are publicly auditable, and they are immutable. Once a smart contract is deployed to the mainnet, you can easily check what is inside the smart contract, and you don’t have to trust the deployer or the platform that utilizes this same smart contract. You only need to trust the smart contract itself to perform certain actions when the requirements are met. 

The Important Use Cases Of Ethereum Smart Contracts

Ethereum smart contracts are used for various purposes. One of the most popular smart contract’s use cases is to build DeFi (decentralized finance) applications. Nowadays, the most popular Ethereum’s applications are DeFi apps – and that could happen due to the utilization of smart contracts.

We won’t get into too many details about DeFi here, but basically, they work similarly to real traditional finance applications where you can trade, lend, borrow, or pay interests in the application. The difference is that with DeFi everything is done automatically within the smart contracts. 

So, even if you don’t really know who are the individuals behind one DeFi platform, as long as you trust the smart contracts that power the DeFi functions, you would still believe it, because you know the records inside the same smart contracts couldn’t be changed, unless if the same platform deploys a new one and utilize a new smart contract (but then, you would find out about it).

This is why DeFi platforms are getting more popular because people can just trade and lend/borrow crypto with each other without the need to trust any entity or individual.

Another important use case of a smart contract is to fund operations of a certain entity or company. For example, let’s say there’s a new fundraising event by a certain crypto startup. The same crypto startup can just create a smart contract to show potential investors or token purchasers that they would send their ERC-20 version of the token in exchange of ETH or ERC-20 stablecoins. And then, the potential token buyers and investors can check the smart contract and be sure that they would receive the tokens from this same startup as soon as they deposit their ETH or stablecoins into the smart contract.

There are, of course, other use cases of an Ethereum smart contract – such as for multi-sig operation or to trade game collectibles. But, again, the basic premise of a smart contract is to eliminate trust. There’s no centralized party that can easily edit what’s inside the contract. You don’t need to trust the counterparty nor the programmer. As long as you can read and know exactly the requirements and conditions inside one live smart contract, you only need to trust the codes. 

There’s a huge potential in that because in the future, it’s quite possible that smart contract use cases would become much more mainstream.

Final Thoughts

At the end of the day, the concept of a smart contract is appealing to everybody – even to non-crypto believers. It automates a huge amount of processes as well as eliminates the need for trust in a significant way. Ethereum smart contracts can be used to create and operate DeFi applications, decentralized games, other types of DApps, or even a decentralized exchange. It can be used to power gambling DApp or for distribution of power in the name of multi-signature addresses. 

The potential here is huge, and it’s exactly the reason why Ethereum could become popular in the first place – nowadays Ethereum smart contracts are among the most popular things in the crypto space. Many new projects and applications are being operated on Ethereum blockchain with the utilization of Ethereum smart contracts.

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