Trading Ethereum (ETH) on Beaxy

What Ethereum smart contracts are

If you want to get how smart contracts work, here’s a simple example given by the scientist Nick Szabo. Think of a soda vending machine. You drop the money in, and the machine gives you your order, no third parties involved. It pours you the very kind and amount of soda you chose, no control or intermediaries involved. Once your drink is dispensed, the machine can neither demand it back nor violate the work conditions and pour the wrong amount of wrong soda —  provided it’s working properly, of course. Smart contracts work essentially the same way.

Considering present-day developments, this can help you in a variety of situations. Say, you order some service online, but don’t pay for it right away, entering into a smart contract instead. A smart contract is executed as a kind of program with certain conditions, written in code. This way, the amount payable gets frozen in the blockchain; it is no longer yours, but not yet the recipient’s either. Once the contractual obligations are fulfilled and the service received in the agreed-upon form and quantity, the contract gets signed and the transaction completed, with the payment automatically transferred to the recipient. All this happens without involving any third parties such as banks; the money is never transferred to any intermediaries, but only held in the blockchain system for the duration of the contract.

Smart contracts are just like any other contracts, only they exist in the Ethereum system. Their execution is guaranteed by a computer program based on a mathematical system, transparent and impartial. Neither the banks, nor the government, nor any human factor will ever be involved in the execution of agreements and the transfer of funds.

Today’s global economic network consists of the individual countries’ economies. Enter Ethereum, offering a digital economy independent of any countries or government bodies.

Distinguishing between Ethereum and Ether

You need to understand that Ethereum, a blockchain system, and Ether, a cryptocurrency, are different things. Here’s another simple example to help you get the grip of it.

Say, you need to transfer a few USD to Spain. To that end, you’re going to make a bank transfer. This is where SWIFT, the main system for interbank messaging, enters the picture. It’ll help the bank in Spain receive information about the transfer you made.

Now try replacing dollars in this example with Ether, and the banks, along with the SWIFT interbank telecommunications system, for Ethereum, and you’ll get the gist of it.

Storing and using Ether

The Ethereum system provides for two methods of storing, receiving, and transfering assets: a wallet and a smart contract.

The difference between the two is that the assets in a wallet are managed by a person, while in smart contracts, an algorithm does that. To control a regular wallet, you need two keys, public and private; a smart contract is controlled by a hash of its own code. This guarantees unchangeability of a smart contract; should even a single character in the code get altered, the hash will change irreversibly, and the blockchain will reject it.

A smart contract is just what it is: a contract written as code that can be executed by making a transaction to the linked address. Information on every action with Ether, such as transferring it to someone, is recorded by the miner as a transaction in the Ethereum blockchain. By executing the smart contract code, another block gets added, and the program code is executed. Each transaction involves paying a commission. This fee is used to reward the miners whose computers are involved in adding new blocks and executing smart contract code; they get paid for their work this way.