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What are Smart Contracts?
Though this overview is largely about Ethereum, practically all the concepts apply to smart-contract enabled blockchains!
Smart contracts are the primary reason that the field of blockchain development exists.
Ethereum's core innovation in 2013 was to allow developers to write small chunks of code, known as smart contracts, that could be deployed to the Ethereum network to run independently of their creators. In Ethereum, smart contracts are written in Solidity, a high-level programming language designed to run on the Ethereum Virtual Machine.
A smart contract is a self-contained program that defines a public agreement, or "contract" that automatically executes the terms of the agreement when called by a user on the blockchain.
Unlike traditional programming languages, smart contracts have the following properties:
- Transparency: Smart contracts are published to the blockchain, and can be read and written by anyone who has access to the blockchain.
- Simplicity: Because smart contracts are expensive to deploy onto the blockchain and contain sensitive logic dictating the flow of financial transactions, they tend to be much smaller and simpler than most codebases.
- Immutability: Once a smart contract has been deployed, it (typically) can't be modified and is guaranteed to function identically no matter when its called! This allows smart contracts to operate as reliable, trusted third parties - because no individual controls the smart contract, it can act as a financial intermediary, a trustworthy automated market maker, or much more by guaranteeing impartiality.
Once deployed, these smart contracts behave as independent actors that are fully transparent but can contain complex logic. Therefore, instead of only human users owning accounts on Ethereum, there are two types of accounts:
- Externally Owned Accounts (EOAs) managed by a human user.
- Contract Accounts which are managed by their underlying smart contract code.
What's the difference between EOAs and Contract Accounts?
Impressively enough, these two types of accounts can do basically the same things! Both of these account types can:
- Receive or send fungible tokens (Ether) to any account
- Receive or send non-fungible tokens (a CryptoKitty) to any account
- Trigger another contract account - allowing a smart contract to run other smart contracts.
- Generate new smart contracts - allowing a smart contract to act as a contract factory!
However, there are a few limitations of contract accounts:
- Contract accounts can't instantiate actions on their own - they can only respond to transactions they receive (typically from EOAs).
- Contract accounts are controlled entirely by their code, whereas EOAs are controlled by their associated private keys.
What is Gas and What Do I Need It For?
There's a couple major limitations when it comes to running smart contracts:
- Every deployed transaction, smart contract, or execution of a smart contract, must be run on every single full node on the Ethereum blockchain to guarantee validity. This is wildly inefficient (though newer blockchains are streamlining this)!
- Because smart contracts are Turing complete, they can potentially execute forever, locking up every single node on the blockchain.
That's where gas comes in! Every computation or transaction made on the blockchain costs some fees, known in Ethereum as gas. These fees prevent expensive (or endless) contract executions, ensure miners are fairly compensated for the work they do, and provide a fair market to prioritize which transactions make it onto the blockchain.
There's two major metrics to consider here: gas limit, or the maximum amount of gas you're willing to spend on your transaction, and the gas price (or price per gas unit), measured in gwei.
What is "gwei" or "wei", and how do they relate to ETH?
“Wei” is the smallest unit of Ether, where 10¹⁸ Wei represents 1 Ether. One gwei is 10⁹ wei, and there are 10⁹ gwei per Ether.
By multiplying the gas price by the gas limit, you'll get the maximum amount of Ether you're willing to spend on gas fees for any particular transaction.
Learn about gas execution
When a smart contract call is made, the call (or transaction) will attempt to use the gas provided while the program is executed.
- If the call succeeds, the unused gas will be returned to the sender.
- If the call fails because it ran out of gas, the entire transaction will revert, undoing all changes to the blockchain. None of the gas will be returned, since it will all have been used up during the computation process.
A portion of gas fees from a successful transaction will be burned (or removed from the total supply) according to the new EIP-1559 spec, and the rest will be sent to the miner that added your transaction to the blockchain.
What are NFTs?
NFTs, otherwise known as non-fungible tokens, are an extension of blockchain technology enabling one-of-a-kind digital collectibles to be generated, traded, and sold on the blockchain. For instance, an NFT can represent a unique kitten avatar, a "digitally signed" original copy of an album, a physical piece of art, or membership in an exclusive community.
What does fungible mean?
A token or asset is fungible when its units can be interchangeably replaced with each other, such that they are essentially identical in functionality. For instance, any particular U.S. dollar, barrel of refined petroleum, or GA ticket to Burning Man can be exchanged for another with practically no impact on its utility. Bitcoin, Ethereum, and all "traditional" cryptocurrencies are fungible tokens.
Non-fungible assets, on the other hand, have intrinsic value based on the unique status of that asset. For instance, two Pokemon trading cards may have wildly different values, because one is a holographic first-edition Charizard worth $1 million and the other is your regular run-of-the-mill Pikachu.
From a technological perspective, NFTs are cryptographic tokens created via smart contracts by adhering to a specific set of standards governing the issuance of the tokens and enabling metadata. This metadata connects the NFT token to its associated content (e.g. an image, URL, or animation). In Ethereum, two standards currently exist: ERC-721 and EIP-1155.
NFTs have a number of unique properties that have helped them find a clear market niche and allowed them to mushroom into a multi-billion dollar industry:
- Scarcity: Since the total quantity of items available in an NFT release can be arbitrarily limited, demand can be driven by availability based on the perceived value. Thanks to this demand, NFT avatar collections such as Cryptopunks have skyrocketed in value.
- Public history and proof of ownership: Because all sales and ownership of NFTs are tracked on the blockchain, it's possible to see the entire journey of any NFT from conception to the current owner. Furthermore, it's quite easy for someone to prove that they own an NFT publicly - enabling a public ledger of the owners of a particular NFT collection.
Browse some of our articles below to get a better understanding of the novel use cases NFTs are involved in today and how to get started building NFTs and NFT collections from scratch!
Where To Next?
If you've made it to this point, it's time for a self-congratulatory pat on the back! This might be the end of our introductory web3 course, but it's just the beginning of your blockchain development journey. From DeFi to DAOs to novel blockchains with new technologies, there's so much still to build it's staggering.
There's plenty more useful content out there, both on this website and across the entire internet, and we're here to guide you towards the highest-quality, best-curated tools in the entire ecosystem! We've left a few links below with resources that might pique your interest.
And if you want to get in touch, feel free to join the Discord and give us feedback on anything about Web3 University! Happy BUIDLing!
