Ethereum and Smart

Contract
FIN451 / MBA651
What is Ethereum?

•Ethereum is a decentralized, open-source blockchain platform

that allows developers to build and deploy decentralized
applications (dApps).
•Launched in 2015 by Vitalik Buterin and a group of co-
founders, Ethereum extends the functionality of Bitcoin’s
blockchain by enabling not just the transfer of cryptocurrency,
but also the execution of smart contracts.
Ethereum’s Purpose
• While Bitcoin is primarily designed as a digital currency, Ethereum
was created to serve as a platform for decentralized applications
(dApps), powered by smart contracts.
• Ethereum allows developers to write and deploy smart contracts on its
blockchain, making it the first blockchain to support this level of
programmability.
Key Components of Ethereum - Ethereum
Virtual Machine (EVM)
• The Ethereum Virtual Machine (EVM) is the runtime environment for
smart contracts on Ethereum.
• It is a decentralized computer that executes smart contract code
exactly as it is written, across thousands of nodes in the network.
• The EVM is what makes Ethereum unique, as it enables developers to
create complex, programmable contracts that can run on the
blockchain.
Key Components of Ethereum - Ether
(ETH)
• Ether (ETH) is the native cryptocurrency of the Ethereum network,
and it plays a crucial role in the execution of smart contracts.
• When a smart contract is executed on Ethereum, it consumes
computational resources. These resources are paid for in ETH, through
a mechanism called "gas."
• Gas is a unit of measurement that dictates the amount of
computational work required to execute a transaction or a smart
contract. The more complex the smart contract, the more gas it
requires, and the more ETH must be paid.
Key Components of Ethereum - Smart
Contract
• A smart contract is a self-executing contract with the terms of
the agreement directly written into lines of code.
• This code and the agreements contained within it exist across
a distributed, decentralized blockchain network.
• Smart contracts automatically execute and enforce the terms
of the contract without the need for intermediaries like banks
or lawyers.
Key Components of Ethereum -
Decentralized Applications (dApps)
• Many dApps on Ethereum are powered by smart contracts.
• These dApps leverage the Ethereum blockchain’s decentralized nature
to offer services like decentralized finance (DeFi), gaming, and more.
• For instance, a DeFi application might use a smart contract to
automatically lend or borrow cryptocurrency without needing a bank
or intermediary.
•
Key Components of Ethereum - Token
Standards (ERC-20, ERC-721)
• Ethereum’s smart contract functionality has led to the
creation of various token standards, like ERC-20 (for
fungible tokens) and ERC-721 (for non-fungible tokens, or
NFTs).
• These standards define a set of rules for tokens, enabling the
creation of digital assets that can be traded, transferred, or
used within dApps on the Ethereum network.
Why Ethereum is Important for Smart Contracts:
1. Pioneering Platform: Ethereum was the first blockchain to enable Turing-
complete smart contracts, which means that developers can write code that can
perform any computation, given enough resources. This flexibility has made
Ethereum the most popular platform for creating and deploying smart contracts.
2. Community and Ecosystem: Ethereum has a large and active developer
community, which has led to the creation of a vast ecosystem of tools, libraries,
and frameworks that make it easier to develop, deploy, and interact with smart
contracts.
3. Network Effects: Because Ethereum was the first major platform to support
smart contracts, it has benefited from strong network effects. A large number of
developers, projects, and users have congregated around Ethereum, further
solidifying its position as the leading smart contract platform.
Examples of Smart Contracts on Ethereum
 DeFi Protocols: Decentralized finance applications like Uniswap, Aave,
and Compound use smart contracts to facilitate trading, lending, and
borrowing of cryptocurrencies without the need for a central authority.
 NFT Marketplaces: Platforms like OpenSea and Rarible use Ethereum
smart contracts to manage the creation, sale, and transfer of non-
fungible tokens (NFTs).
 Crowdfunding: Platforms like Gitcoin use smart contracts to manage
funding for open-source projects, automatically distributing funds based
on predefined criteria.
Key Features of Smart Contracts:
 Self-Executing: Once the predefined conditions are met, the contract automatically executes the
agreed-upon actions.
 For example, if a smart contract is set up to transfer ownership of an asset when payment is
received, it will automatically do so when the payment is confirmed on the blockchain.
 Immutable: After a smart contract is deployed on the blockchain, it cannot be altered.
 This immutability ensures that the terms agreed upon at the start of the contract cannot be
changed, which adds a layer of security and trust.
 Transparent: Since smart contracts are stored on a blockchain, they are visible and verifiable by
anyone with access to the blockchain.
 This transparency helps in reducing fraud and misunderstandings.
Key Features of Smart Contracts:
 Decentralized: Smart contracts operate on decentralized networks, meaning they
are not controlled by a single entity.
 This decentralization ensures that the contract’s execution is not dependent on
any single party, reducing the risk of manipulation.
 Trustless: With smart contracts, there’s no need to trust the other party in the
transaction.
 The contract will execute based solely on the code, and there’s no need for
intermediaries to enforce the terms.
How Smart Contracts Work:
• Code Development: A smart contract is written using a programming language like
Solidity (for Ethereum).
• The code specifies the rules and penalties of the agreement and is stored on the blockchain.

• Deployment: Once the smart contract is written and tested, it is deployed onto a
blockchain like Ethereum.
• This deployment gives the contract a unique address on the blockchain.

• Execution: When conditions defined in the contract are met, the contract executes
automatically.
• For example, if a smart contract is set up for a crowdfunding campaign, it might release funds to the
project creator only if the campaign reaches its funding goal by a specific date.

• Final Products: Once executed, the result of the contract (like the transfer of assets or
tokens) is recorded on the blockchain, creating a permanent, tamper-proof record of the
transaction.
Practical Examples of Smart Contracts:
• Financial Transactions: Smart contracts can be used for automated payments,
loans, and insurance claims.
• For instance, an insurance company might use a smart contract to automatically pay out claims
when certain conditions (like flight delays or cancellations) are met.

• Supply Chain Management: In a supply chain, smart contracts can automatically

track the movement of goods and release payments when goods are delivered to a
specific location.
• Real Estate: Smart contracts can automate the process of transferring property
ownership once payment is received, reducing the need for intermediaries like real
estate agents or escrow services.
• Voting Systems: Smart contracts can be used to create transparent and tamper-proof
voting systems, ensuring that votes are counted accurately and fairly.
Benefits of Smart Contracts:
 Efficiency: By automating processes, smart contracts can reduce the time and
cost associated with traditional contract execution.
 Security: The cryptographic security of the blockchain ensures that smart
contracts are secure from tampering.
 Accuracy: Since smart contracts are digital and automated, they reduce the
errors that can occur with manually processed contracts.
 Trust: The transparency and immutability of smart contracts build trust between
parties who may not know each other.
Conclusion
• Smart contracts are a powerful tool in the world of
blockchain technology, offering automation, security, and
trust in executing agreements without the need for third-party
intermediaries.
• They have a wide range of applications, from financial
transactions to complex supply chain logistics, and are poised
to revolutionize how contracts are handled in various
industries.
•