Ethereum came into existence in 2014, and from then till now, it has gained immense popularity in the crypto market. It is one of the well-known cryptocurrencies after Bitcoin. With the promise of smart contracts that are powered by blockchain technology, it provides a more pragmatic role in comparison to Bitcoin.
How Ethereum Works
Ethereum, like other cryptocurrency, is based on a blockchain network. It is a decentralized, distributed public ledger that verifies & records all transactions.
Cryptography get used in blockchain transactions to keep the network safe & verify transactions. Users use the computers to “mine,” or calculate complicated mathematical equations that verify every transaction on the network and add the latest blocks to the system’s blockchain. This verification process is called the consensus algorithm, specifically the Proof of Work consensus algorithm.
Participants are given cryptocurrency tokens as an incentive. These tokens are known as Ether (ETH) in the Ethereum system. Ether is a virtual currency that may be used for financial transactions, investments, as well as a store of value. Ether is held and exchanged on the Ethereum blockchain network. Outside of ETH, this network provides a range of other services.
Data can be stored, and decentralized apps can be executed over the Ethereum network. People can host software on the Ethereum blockchain rather than on a server owned and controlled by Google or Amazon, where just one business controls the data.
Before understanding the role of smart contracts in the context of Ethereum, we need to know what smart contracts are.
What are smart contracts?
Smart contracts are self executive contracts that allow a contract or transaction to be completed automatically without interference from a centralized third party. Nick Szabo, a well-known cryptographer and a computer scientist, invented this term in 1996. He defined smart contracts as computerized transaction protocols that are used for executing the terms of a contract.
The vending machine concept
Smart contracts work just like a vending machine. When we insert coins (input) in the vending machine, this machine provides soda along with the determined amount of change (output). It processes the input and deducts the required sum to qualify the user for output and change. In case the input is lower than the amount needed for buying a can of soda, then the full amount is given back to the user.
The same is the condition with smart contracts; it has logic programmed into it. Just like the vending machine eliminates the requirement of a vendor employee, smart contracts remove intermediaries in many industries.
Smart contracts on Ethereum
In July 2015, Vitalik Buterin, the founder of Ethereum, was the one who first founded a way to implement smart contracts on the blockchain. The Ethereum network allowed blockchain technology to go a step further. Now, instead of only facilitating transactions between users, fully functional smart contracts create programmatic rules that execute transactions by using pre-defined terms.
How to create a smart contract?
Transactions on the Ethernet network are based on proof-of-work as Bitcoin, with plans to move to proof-of-stake in the future. In Ethereum, the transaction fee is paid in the form of “gas”. It then helps the smart contract to work. More gas is required for operating more complicated smart contracts.
There are hundreds of thousands of applications, games, tokens and other contracts present on Ethereum that operate by using the technology of Smart Contracts.
Some advantages of smart contracts:
All the associated transactions on smart contracts have a digital trail that lasts forever because they are hosted on the blockchain. This adds a strong element of safety and security.
There is no need for any authority or intermediary to execute the contract for users in smart contracts.
The smart contract has codes that are publicly visible on the blockchain and make it possible to check and audit if the contract will function as intended or not.
Understand ERC20 Tokens
ERC20 tokens are one of the most common types of Ethereum-based cryptocurrency. It is a well-known defined standard for a basic token for operating the smart contract. It helps in conducting basic interactions within the Ethernet network like transfer between addresses, usage in smart contracts and can be flexibly created to support a broad range of applications.
There are many other non-fungible tokens that differ from each other. These could be tokens that have a specified set of unique parameters linked to them which makes them one-of-a-kind.
Hope the provided information is helpful for you to understand Ethereum smart contracts. Now, if you are planning to buy Ethereum from the best cryptocurrency exchange in India, you can trust one of the most reliable platforms: Wazirx.