How Do Smart Contracts Work?

Smart Contracts

Ethereum was invented to allow the execution of short programs and applications in the blockchain. While bitcoin focused on decentralized payments, ethereum created a platform for users to complete transactions by pushing arbitrary code. These short programs deployed on a blockchain are digital contracts, and they execute codes to react to transactions and hold funds or ether tokens. Read on to understand how smart contracts work.

Characteristics of Smart contracts

  • Automate all tasks and are self-verifying
  • They are self-enforcing, provided the obligations are met at all stages
  • They are immutable and tamper-proof; hence no one can change the contract

Aspects of Smart Contracts

A smart contract runs like a regular application that implements business rules with the blockchain as its database. Besides, it is executed in an isolated fashion. For instance, a digital contract will only access data on the blockchain related to the agreement or the parties involved without involving third parties.  Some of the essential aspects of executing digital contracts include:

Ethereum Virtual Machine(EVM)

EVM is like a global supercomputer responsible for executing all the contracts in the blockchain. Hence, it provides a runtime environment for the digital contracts generated in the ethereum blockchain.  With the EVM, you can run any program irrespective of the programming language; it needs adequate memory and time. This cuts the process of creating blockchain applications faster and simple. Instead of building an original blockchain for every dApp, ethereum provides a network of creating multiple apps.


Executing smart contracts requires computing resources and storage space. Since the resources are scarce, running a code in the EVM has a price tag expressed in Gas, which are fractions of ether. Gas is a unit of measurement for determining fees for smart contract transactions. Every transaction requires Gas used by executing lines and for securing a storage space for the transactions. If your smart contract runs out of Gas, the EVM will not complete the execution process. However, the cancellation will not bring back the tokens already spent.

When you create a smart contract in the ethereum system, you must assign the ether tokens you want to pay. While you are free to set your price, validators will prioritize transactions with a higher price. Therefore, digital contracts with a higher gas limit will be higher in the execution queue. If your smart contract requires complex computations, you will need more Gas to run them.


Smart contracts are unchangeable. Once the developer defines the byte code, no one can change or update it in the blockchain system. If you want to amend the digital contract due to an error, you must deploy a new smart contract. Therefore, before you deploy, ensure you test the code quality to avoid introducing bugs into the system that will ruin the digital contract.


The programming language for coding digital contracts is solidity, and it works like other object-oriented languages that permit arbitrary computations. Solidity works perfectly with EVM, and understanding how it works helps in writing ethereum smart contracts. When you want to create a digital contract or receive tokens, solidity simplifies the process. However, you need a solidity compiler to translate the smart contract code into EVM byte code that will deploy the transaction in the ethereum blockchain.

Creating Smart Contracts

You can build smart contracts on multiple blockchain platforms like NEO and Ethereum. Since ethereum is popular among developers, it is useful for executing smart contracts. To create the contracts, developers use solidity programming language, which helps them write self-enforcing codes that can run on the Ethereum virtual machine. Solidity is a static and object-oriented language with similarities to C++ or javascript. Hence, developers with experience in javascript can transition to solidity easily.

Blockchains that Process Smart contracts

While the ethereum blockchain is renowned for smart contracts, other networks can also implement them. Some of the popular platforms using smart contracts include:

  • NEO is a blockchain project from China that aids the development of the smart economy. The decentralized network uses virtual machines to fulfill the conditions provided by smart contracts. With virtual machines, the digital contract code is optimized and organized to work with high efficiency. While the smart economy concept can be efficient in the long run, it requires more execution time than the ethereum blockchain.
  • Exonum is a framework that allows governments and private entities to build a blockchain system that will solve their problems. With the secure platform, organizations can develop systems that provide different services, including smart contracts. However, the developers need to be conversant with the Rust programming language to create smart contracts.
  • Ubiq platform can launch and implement automated smart contracts. With the open-source code, developers can also create decentralized apps on the platform. While the blockchain came into existence in 2014, it switched from Jumbucks blockchain to Ubiq blockchain that operates like ethereum. However, the Ubiq platform focuses on high bandwidth automated contracts for companies and positions itself as a supercomputer.
  • Nxt blockchain platform uses open source code to launch automatic smart contracts and DApps. Developers can launch secure trading platforms, electronic payment systems and instant messengers. With Nxt, transactions rely on Proof-of-Stake for executions, and smart contracts are created in the platform using the template provided. Users cannot run their contracts.

The Future of Smart Contracts

Technology continues to penetrate every sphere of business, and smart contracts can transform the operation methods.  For instance, digital contracts can execute transactions securely if both parties adhere to the legally binding rules. Ethereum blockchain is suitable for breaking down complex agreements into step-by-step processes executable through digital contracts.

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