Chapter 3

Smart Contracts
Smart Contracts

• Ethereum Networks
• What is a Smart Contract?
• Ethereum Virtual Machine, Ether, Gas
• DApps
• Decentralized Autonomous Organizations (DAO)
• Hard and Soft Forks
• Initial Coin Offerings
• Demo of Smart Contracts
Introduction
• A smart contract is a computer program or a transaction protocol
which is intended to automatically execute, control or document
legally relevant events and actions according to the terms of a
contract or an agreement.
• The objective of smart contracts are the reduction of need in trusted
inter-mediators, arbitrations and enforcement costs, fraud losses, as
well as the reduction of malicious and accidental exceptions.
• Smart contracts are simply programs stored on a Blockchain that run
when predetermined conditions are met.
Ethereum Networks

• Ethereum is a decentralized blockchain platform that

establishes a peer-to-peer network that securely executes and
verifies application code, called smart contracts
• Ethereum is the hottest cryptocurrency in the Blockchain at
present. Cryptocurrency is the word that’s used to describe
decentralized digitized currencies.
• The first cryptocurrency was created in 2008 known as Bitcoin.
Ethereum is relatively new cryptocurrency and was invented in
2013.
Ethereum network on a World Map
Ethereum Networks

• With the Ethereum Blockchain , rather than Bitcoin the miners will work to
earn Ether or ETH.
• ETH is the fuel that needed to run the Ethereum network.
• Ethereum is a technology that is home to digital money, global payments and
applications.
• Ethereum is a Blockchain platform with its own cryptocurrency, called
Ether(ETH) and solidity is its own programming language.
• The network’s users can create, publish, monetize and use applications on the
platform and use its Ether cryptocurrency as payment.
• Ethereum Blockchain allows building decentralized apps defined by smart
contracts.
Ethereum Networks
• The node of the network run the Ethereum Virtual Machine(EVM)
and execute the instructions according to the smart contracts.
Ethereum nodes run the EVM to maintain consensus across the
Blockchain.
• The idea behind Ethereum was created by Vitalik Buterin.
• An Ethereum network has all the nodes connected to each other
using the P2P network and each node keep the latest copy of the
Ethereum Blockchain ledger.
• The three types of Blockchain nodes are mining nodes , full nodes
and light node.
What is a smart contract?
• Smart contracts are simply programs stored on a blockchain
that run when predetermined conditions are met. They
typically are used to automate the execution of an agreement
so that all participants can be immediately certain of the
outcome, without any intermediary's involvement or time loss.
How smart contracts work

• Smart contracts work by following simple “if/when…then…” statements that are

written into code on a blockchain. A network of computers executes the actions
when predetermined conditions have been met and verified. These actions could
include releasing funds to the appropriate parties, registering a vehicle, sending
notifications, or issuing a ticket. The blockchain is then updated when the
transaction is completed. That means the transaction cannot be changed, and
only parties who have been granted permission can see the results.
• Within a smart contract, there can be as many stipulations as needed to satisfy
the participants that the task will be completed satisfactorily. To establish the
terms, participants must determine how transactions and their data are
represented on the blockchain, agree on the “if/when...then…” rules that govern
those transactions, explore all possible exceptions, and define a framework for
resolving disputes.
• Then the smart contract can be programmed by a developer – although
increasingly, organizations that use blockchain for business provide templates,
web interfaces, and other online tools to simplify structuring smart contracts.
Benefits of smart contracts

• Speed, efficiency and accuracy

• Once a condition is met, the contract is executed
immediately. Because smart contracts are digital and
automated, there’s no paperwork to process and no
time spent reconciling errors that often result from
manually filling in documents.
Benefits of smart contracts
• Trust and transparency
• Because there’s no third party involved, and because
encrypted records of transactions are shared across
participants, there’s no need to question whether
information has been altered for personal benefit.
Benefits of smart contracts
• Security
• Blockchain transaction records are encrypted, which
makes them very hard to hack. Moreover, because each
record is connected to the previous and subsequent
records on a distributed ledger, hackers would have to
alter the entire chain to change a single record.
Benefits of smart contracts
• Savings
• Smart contracts remove the need for intermediaries to
handle transactions and, by extension, their associated
time delays and fees.
Ethereum Virtual Machine(EVM)
• The Ethereum Virtual Machine (EVM) is a powerful, sandboxed virtual stack
embedded within each full Ethereum node, responsible for executing
contract bytecode. Contracts are typically written in higher level
languages, like Solidity, then compiled to EVM bytecode.
• This means that the machine code is completely isolated from the
network, filesystem or any processes of the host computer. Every node in
the Ethereum network runs an EVM instance which allows them to agree
on executing the same instructions. The EVM is Turing complete, which
refers to a system capable of performing any logical step of a
computational function. JavaScript, the programming language which
powers the worldwide web, widely uses Turing completeness.
• Ethereum Virtual Machines have been successfully implemented in various
programming languages including C++, Java, JavaScript, Python, Ruby,
and many others.
EVM
Architecture of Ethereum
Ether(ETH)
• Ether is the transactional token that facilitates operations on the Ethereum
network.
• While ether can be thought of as the cryptocurrency of the Ethereum network,
metaphorically speaking, it is more accurate to refer to it as the "fuel" of the
network.
• The Ethereum technology uses blockchain development to replace the storage of
consumer data, including financial records, by third-party internet companies.
• Ether is the world’s second-largest virtual currency by market capitalization as of
2021; it is second only to Bitcoin (BTC), according to market value.
• Ethereum developers started working on shifting the network from a proof-of-
work (PoW) system to a proof-of-stake (PoS) system in 2017; the new underlying
network is known as Ethereum 2.0 and it has yet to be fully released
Gas
• On the Ethereum blockchain, gas refers to the cost necessary
to perform a transaction on the network. Miners set the price
of gas based on supply and demand for the computational
power of the network needed to process smart contracts and
other transactions.
• Transaction fee=Total gas used* gas price
DApps
• Decentralized applications (dApps) are digital applications or
programs that exist and run on a blockchain or peer-to-peer (P2P)
network of computers instead of a single computer.
• DApps (also called "dapps") are outside the purview and control of a
single authority.
• DApps—which are often built on the Ethereum platform—can be
developed for a variety of purposes including gaming, finance, and
social media.
DApps
• Decentralized applications—also known as "dApps" or "dapps"—are
digital applications that run on a blockchain network of computers
instead of relying on a single computer.
• Because dApps are decentralized, they are free from the control and
interference of a single authority.
• Benefits of dApps include the safeguarding of user privacy, the lack
of censorship, and the flexibility of development.
• Drawbacks include the potential inability to scale, challenges in
developing a user interface, and difficulties in making code
modifications.
Decentralized Autonomous Organizations (DAO)

• One of the major features of digital currencies is that they are decentralized.
• This means they are not controlled by a single institution like a government
or central bank, but instead are divided among a variety of computers,
networks, and nodes.
• In many cases, virtual currencies make use of this decentralized status to
attain levels of privacy and security that are typically unavailable to standard
currencies and their transactions.
• Inspired by the decentralization of cryptocurrencies, a group of developers
came up with the idea for a decentralized autonomous organization, or DAO,
in 2016.
Decentralized Autonomous Organizations (DAO)
Decentralized Autonomous
Organization (DAO)
• The DAO was an organization created by developers to automate
decisions and facilitate cryptocurrency transactions.
• In June 2016, due to programming errors and attack vectors,
hackers attacked the DAO, accessing 3.6 million ETH.
• Digital exchange currencies de-listed the DAO token in September
2016.
Hard and Soft Forks
• Cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) are powered by a
decentralized open-source software called a blockchain. A fork is a change
to the blockchain’s underlying protocol. A blockchain fork is an important
upgrade to the network and can either represent a radical change or a
minor one and can be initiated by developers or community members.
• It requires node operators — machines connected to the blockchain that
help validate transactions on it — to upgrade to the latest version of the
protocol. Every node has a copy of the blockchain and ensures new
transactions do not contradict its history.
• A hard fork is a radical upgrade that can make previous transactions and
blocks either valid or invalid and requires all validators in a network to
upgrade to a newer version. It’s not backward-compatible.
• A soft fork is an upgrade to the software that is backward-compatible and
has validators in an older version of the chain see the new version as valid.
Hard Fork
• A hard fork refers to a radical change to the protocol of a blockchain
network that effectively results in two branches, one that follows the
previous protocol and one that follows the new version.
• In a hard fork, holders of tokens in the original blockchain will be
granted tokens in the new fork as well, but miners must choose
which blockchain to continue verifying.
• A hard fork can occur in any blockchain, and not only Bitcoin (where
hard forks have created Bitcoin Cash and Bitcoin SV, among several
others, for example).
Soft Fork
• In blockchain technology, a soft fork is a change to the
software protocol where only previously valid transaction
blocks are made invalid. Because old nodes will recognize the
new blocks as valid, a soft fork is backwards-compatible.
Initial Coin Offerings
• An initial coin offering (ICO) is the cryptocurrency industry's
equivalent to an initial public offering (IPO). A company seeking to
raise money to create a new coin, app, or service can launch an ICO
as a way to raise funds.
• Interested investors can buy into an initial coin offering to receive a
new cryptocurrency token issued by the company. This token may
have some utility related to the product or service that the company
is offering, or it may just represent a stake in the company or project.
Initial Coin Offerings
• Initial coin offerings are a popular way to raise funds for products and services
usually related to cryptocurrency.
• ICOs are similar to initial public offerings, but coins issued in an ICO can also
have utility for a software service or product.
• Some ICOs have yielded massive returns for investors. Numerous others have
turned out to be fraudulent or have performed extremely poorly.
• To participate in an ICO, you usually need to first purchase a more established
digital currency, plus have a basic understanding of cryptocurrency wallets and
exchanges.
• ICOs are, for the most part, completely unregulated, so investors must exercise
a high degree of caution and diligence when researching and investing in ICOs.
Working of ICO