Module 5: Smart Contracts and Ethereum 101

1. Define smart contracts and explain how they are executed on a blockchain.

Definition: A smart contract constitutes a sophisticated, self-executing program encoded

with the terms of an agreement between two or more parties.

Execution on Blockchain:

1. Design and Coding:

o Smart contracts are written in specialized programming languages such as
Solidity or Vyper. The source code defines the functions, logic, and
preconditions required for execution.
2. Compilation:
o Source code undergoes compilation into Ethereum Virtual Machine (EVM)
bytecode, enabling execution across Ethereum nodes.
3. Deployment:
o Deployment involves submitting a transaction containing the bytecode and
metadata to the blockchain. This process requires a gas fee, reflecting
computational costs.
4. Triggering Execution:
o Execution is initiated through external transactions or contract calls. Users or
other contracts provide input data and Ether to invoke specific functions.
5. Execution by EVM:
 o
The EVM executes the bytecode deterministically, ensuring consistency
across all nodes. Smart contracts interact with blockchain state, such as
updating balances or managing storage.
6. Validation and Consensus:
o Nodes validate transactions and changes to the state. Using Ethereum’s Proof
of Stake (PoS) consensus mechanism, valid transactions are added to the
blockchain.
7. Immutability:
o Once recorded on the blockchain, the transaction and its outcomes are
immutable, ensuring auditability and transparency

2. Compare and contrast smart contracts with traditional legal contracts.

Feature Smart Contracts Traditional Legal Contracts

Code-based, self-executing
Definition Agreements written in legal prose
agreements
Manual execution requiring human
Execution Automatic via blockchain
input
Enforcement Enforced by deterministic code Enforced by courts or legal systems
Requires intermediaries (e.g.,
Intermediaries Eliminates intermediaries
lawyers)
Written in programming
Language Written in natural languages
languages
Transparency Fully transparent and immutable Limited to parties involved
Dispute Hard-coded logic; limited Sophisticated mechanisms via legal
Resolution flexibility systems
Executes millions of transactions
Scalability Labor-intensive and slow
rapidly
Tamper
Immutable and trustless Amendable with due process
Resistance

Advantages of Smart Contracts:

• Enhanced efficiency through automation.

• Lower operational costs due to the removal of intermediaries.
• Increased security via blockchain’s tamper-proof design.

Limitations:

• Rigid and difficult to modify post-deployment.

• Ambiguous legal enforceability across jurisdictions.
• Susceptible to vulnerabilities from coding errors

3. Write a short note on Ethereum and its key features.

Ethereum Overview: Ethereum, proposed by Vitalik Buterin in 2013 and launched in 2015,
is a groundbreaking decentralized platform that extends blockchain’s utility to programmable
applications. By introducing smart contracts, Ethereum enables a wide range of decentralized
applications (DApps) that operate transparently and without central control【5†source】.

Key Features:

1. Ethereum Virtual Machine (EVM):

o A Turing-complete environment enabling the execution of smart contracts. It
ensures consistent outcomes across the network.
2. Native Cryptocurrency (Ether, ETH):
o Serves as both a medium of exchange and a unit of payment for computational
costs (gas).
3. Smart Contract Functionality:
o Automates complex logic for industries like finance, supply chain, and real
estate.
4. Gas Mechanism:
o Ensures efficient resource utilization by charging fees based on computational
demand.
5. Consensus Mechanism:
o Transitioned to Proof of Stake (PoS) for improved scalability and energy
efficiency.
6. Continuous Development:
o Frequent updates (e.g., Byzantium, Istanbul, Serenity) ensure resilience and
scalability.

4. Describe the key elements of the Ethereum blockchain.

1. Accounts:
o Externally Owned Accounts (EOAs): Controlled by private keys, used by
users for transactions.
o Contract Accounts: Autonomous entities governed by smart contract logic.
2. Transactions:
o Fundamental units of interaction within Ethereum, enabling value transfer and
contract invocation.
3. Blocks:
o Structures containing validated transactions, block headers, and state roots.
Blocks form the sequential chain through cryptographic linking.
4. World State:
o Represents Ethereum’s global state, encoded as a Merkle Patricia Trie for
efficient state storage and verification.
5. Gas and Fees:
o Gas measures computational effort, incentivizing efficient execution. Fees are
paid in Ether.
6. Consensus Protocol:
o Ethereum’s PoS mechanism underpins security and consistency across the
decentralized network
5. Explain the concept of precompiled contracts in Ethereum and their uses.

Definition: Precompiled contracts are specialized functions embedded within the Ethereum
protocol at predefined addresses. These functions are implemented at a low level, enabling
efficient execution of complex operations without requiring Solidity code
 .

Uses:

1. Cryptographic Operations:
o Support efficient ECDSA verification and advanced hashing algorithms (e.g.,
SHA-256, RIPEMD-160).
2. Gas Optimization:
o Reduce the computational cost associated with resource-intensive processes,
such as modular exponentiation.
3. Standardization:
o Provide consistent functionality across nodes, enhancing interoperability
6. Explain the Ethereum Virtual Machine (EVM) and its role in executing smart
contracts.

Definition: The Ethereum Virtual Machine (EVM) is a decentralized computation engine

designed to execute smart contracts and enforce blockchain’s consensus rules securely and
efficiently

Role in Execution:

1. Code Interpretation:
o Executes bytecode deterministically, ensuring consistent outcomes across all
Ethereum nodes.
2. Isolation:
o Operates within a sandboxed environment, safeguarding the network from
potential contract vulnerabilities.
3. State Management:
o Facilitates state transitions, maintaining contract storage and account balances.
4. Gas Usage:
o Manages resource allocation by tracking gas consumption during execution.
5. Cross-Language Support:
o Supports high-level programming languages like Solidity and Vyper through
compilation into bytecode.

7. Describe different use cases for smart contracts beyond simple financial transactions.

1. Supply Chain Management:

 o Enables end-to-end transparency and automates payment upon delivery
milestones.
2. Healthcare Applications:
o Facilitates secure, interoperable storage of medical records and streamlines
insurance claims.
3. Decentralized Voting Systems:
o Provides tamper-proof mechanisms for conducting transparent elections.
4. Real Estate Transactions:
o Automates title transfers and escrow services, reducing costs and timelines.
5. Insurance Automation:
o Processes claims dynamically based on input from oracles.
6. Gaming Ecosystems:
o Manages in-game digital assets and supports decentralized game development.

8. Discuss the challenges and limitations of smart contracts.

1. Security Risks:
o Vulnerable to sophisticated attacks, such as reentrancy and overflow exploits.
2. Immutability:
o While ensuring trust, immutability hinders rectification of coding errors post-
deployment.
3. Scalability Constraints:
o Congestion during peak demand inflates gas fees and slows execution.
4. Legal Ambiguity:
o Lack of standardized legal recognition complicates enforceability.
5. Dependence on Oracles:
o Reliance on external data sources introduces potential single points of failure.
6. Complex Development Process:
o Smart contract design demands proficiency in blockchain-specific
programming and security auditing

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