The cryptocurrency industry is nothing new. It's been around for awhile. Ever since Bitcoin was launched back in 2009, many people have been interested in this decentralized platform that allows for peer-to-peer transactions without any involvement from third parties or intermediaries.
As time progressed, more advanced concepts were introduced into blockchains, such as smart contracts, different consensus mechanisms, and NFTs, which all play important roles in shaping how we use today’s most popular cryptocurrencies.
In 2015, Ethereum gave birth to the idea of “smart contracts”; it changed people’s perception of blockchain tech. Nowadays, you can see them being implemented by almost every major player within the crypto space, from exchanges to dApps developers and even governments. So what exactly is a smart contract?
A smart contract is an autonomous computer application running on top of a blockchain network. That’s why it’s also called a dapp (decentralized application). Similar to how traditional database systems store data and execute commands, smart contracts are also capable of doing the same thing while allowing users to send money quickly and securely at low costs.
However, unlike databases, where programs run over centralized servers controlled by one entity, smart contracts run directly on the blockchain itself via nodes. This ensures that no single user/entity controls these codes, thus making the system completely transparent and open source.
Another key feature of smart contracts is their ability to interact with external environments. For example, if there is a need for a particular function or condition to be fulfilled, smart contracts will automatically trigger certain actions based on predefined rules and conditions.
This way, smart contracts allow developers to create highly versatile applications that are able to deal with various scenarios, including financial services, supply chain management, content distribution, social media platforms, retail sales, digital rights management, etc. With the right programming logic, smart contracts can do pretty much anything.
One of the biggest reasons why smart contracts matter so much is because they bring transparency to the current process of creating DApps. Instead of relying solely on the trust of the developers, smart contracts provide a reliable foundation for building trustworthy relationships between individuals and organizations using blockchain technology.
For instance, when someone wants to buy something online, he may feel uncomfortable due to a lack of trust to the counterparty during each transaction.
However, thanks to smart contracts, buyers don’t have to worry about these things. These dapps simply take care of paying the seller according to agreed terms and conditions hard-coded into the smart contracts themselves.
Furthermore, smart contracts enable businesses to build automated processes that require little human intervention. Since smart contracts aren’t executed by humans but by machines, errors are kept to a minimum, and execution speed increases significantly.
Also, instead of having multiple redundant copies of code stored separately, only one copy exists in the entire system. Therefore, everyone involved gets access to the exact same version of the code.
Additionally, smart contracts help improve the overall efficiency of the ecosystem by reducing operational costs and increasing productivity. In fact, some economists believe that replacing manual processes with smart contracts could save up to $20 billion per year globally.
Lastly, smart contracts also make interactions between two parties seamless and easier. Users don’t have to go anywhere else just to complete simple tasks. They can stay connected to the web3 page, where they interact with the dapp throughout the whole process.
Although Ethereum is currently dominating the smart contract market, its limitations have sparked interest in alternative solutions. Some of the more promising projects that aim to solve Ethereum’s shortcomings are BSC, Avalanche, Polygon, and Solana.
Unlike Ethereum, these alternative smart contract chains use delegated proof-of-stake or proof-of-stake consensus mechanisms rather than Ethereum’s PoW algorithm (even though Ethereum will transition to PoS soon as well).
Ethereum has several major drawbacks that include high gas fees, slow transaction speeds, scalability issues, limited storage capacity, etc. On the other hand, BSC or Polygon offers improved performance and reliability compared to ETH. They are faster and cheaper as well. You might want to read my colleague’s article on why he decided to buy Polygon in the current bear market.
The global average TPS (transaction per speed) rate stands at around 13TPS, whereas PoS chains averagely can process over hundreds of TPS, sometimes even over 1000 TPS.
Despite all the major advantages, it’s important to keep in mind that these alternative chains are usually far more centralized than Ethereum. They usually don’t have many entities securing their blockchains, and they are more prone to collusion and centralized manipulation in case something goes wrong.
So, although they are cheaper and faster for the end-users, it’s important to see that they are less secure due to them being more centralized than Ethereum. However, in the future, it’s possible for these chains to have more validators and grow their decentralization aspect.
Before attempting to interact with your very first smart contract, you must understand a few basic principles that dictate how smart contracts operate and perform. Here are three main points worth knowing:
Blockchain vs. Centralized Database:
Blockchain is essentially a distributed ledger technology that stores blocks of data in chronological order. Each node maintains a local copy of said data and updates them whenever changes occur. Hence, blockchain doesn’t rely on central authorities, nor does it require third parties for validation purposes. That’s why smart contracts can work perfectly because they live on the blockchain natively.
Consensus mechanisms refer to methods used to reach an agreement regarding the state of shared data across participants. Some common consensus mechanisms are Delegated Proof-Of-Stake (DPoS), Proof Of Stake (PoS), and Proof of Work (PoW).
As explained earlier, smart contracts are always operated by computers instead of humans, hence requiring a special type of consensus mechanism known as formal verification.
At the time of this article’s publication, Ethereum is still using PoW (though they are transitioning to PoS), while most other smart contract platforms are already on DPoS or PoS.
Gas Fees & Gas Limit:
When designing a smart contract, keep in mind that gas fees determine the number of computational resources necessary for executing specific operations. Moreover, the gas limit refers to the maximum number of units allowed during a given period. Both parameters affect how fast your transaction will be confirmed by the blockchain and the overall usability of smart contracts.
If you’re familiar with Solidity language, then writing your own smart contract isn’t too difficult either. You can start off by opening Remix IDE. You need to learn how the UI works because it’s kind of complicated and will need some time to get used to.
With the above explanation, hopefully, you’re convinced that smart contracts truly hold huge potential for disrupting numerous sectors. Remember, although smart contracts might seem confusing at first, they’re actually not that hard.
Now that you know how smart contracts work, wouldn’t it be cool to try coding your own? And maybe you will become the next crypto billionaire by developing an innovative dapp that people want to use?