UNIT:-1

1. Explain the fundamentals of Smart Contracts and the key terminologies associated with them.
Discuss the role of Smart Contracts in Blockchain technology. (10 marks)

Answer: Smart Contracts are self-executing contracts where the terms of the agreement are written directly
into code and stored on a blockchain. They are decentralized and allow for automatic execution when
predefined conditions are met, removing the need for intermediaries.

Key Terminologies:

 Blockchain: A decentralized digital ledger that stores information in blocks, ensuring security and transparency.
 Smart Contract: A program or script that automatically executes, controls, or documents legally relevant events based
on the terms of the contract.
 Gas: A fee paid to execute Smart Contracts on platforms like Ethereum. It compensates for the computational
resources consumed.
 Decentralization: The process of distributing control away from a central authority, inherent to both blockchain and
Smart Contracts.

Role in Blockchain: Smart Contracts play a pivotal role in blockchain by enabling trustless, automated
transactions. By executing predefined rules, they remove the need for third parties, reduce fraud, and
increase efficiency in industries like finance, insurance, and supply chain management.

2. What is a cryptocurrency, and how do Smart Contracts interact with cryptocurrency systems?
Discuss their relationship and provide examples. (10 marks)

Answer: Cryptocurrency is a digital or virtual form of currency that uses cryptographic techniques to
secure transactions. Unlike traditional currencies, cryptocurrencies operate in a decentralized manner,
typically using blockchain technology for verification and validation of transactions.

Interaction between Smart Contracts and Cryptocurrency: Smart Contracts can be used to facilitate and
automate cryptocurrency transactions, ensuring that they occur only under certain conditions. In this
interaction, Smart Contracts can handle tasks like transferring cryptocurrency between parties, creating
tokens, or setting terms for complex financial agreements.

Example:

 Ethereum: Ethereum's blockchain enables both the creation of cryptocurrency (Ether) and the use of Smart Contracts.
For instance, ERC-20 tokens (cryptocurrencies built on Ethereum) can be automatically transferred between users
when specific conditions in a Smart Contract are met.

3. Describe the architecture of a Blockchain and explain the working of a Virtual Machine within the
Blockchain ecosystem. How does the Virtual Machine execute Smart Contracts? (10 marks)

Answer: Blockchain Architecture: A blockchain is a distributed network of nodes that maintain a

decentralized, immutable ledger. It consists of:

 Blocks: Contains a list of transactions and metadata.

 Chain: Blocks are linked together using cryptographic hashes.
 Consensus Mechanism: Ensures agreement on the state of the blockchain (e.g., Proof of Work, Proof of Stake).
Virtual Machine in Blockchain: A Virtual Machine (VM) is a software emulation of a computer system
that executes code. In blockchain systems like Ethereum, the Ethereum Virtual Machine (EVM) is
responsible for executing Smart Contracts.

Working of the EVM:

 The EVM processes Smart Contract code (written in languages like Solidity) and executes the instructions.
 When a Smart Contract is deployed on the Ethereum network, it’s stored in the blockchain and is executed by the EVM
whenever triggered by a transaction.
 The VM ensures that the code execution is consistent across all nodes in the decentralized network, maintaining
integrity and security.

4. Define a Smart Contract in the context of Blockchain technology. What are the essential
characteristics of Smart Contracts, and how do they differ from traditional contracts? (10 marks)

Answer: A Smart Contract in blockchain technology is a self-executing contract with the terms of the
agreement directly written into lines of code. These contracts are deployed on decentralized networks (e.g.,
Ethereum) and run automatically when certain conditions are met.

Essential Characteristics:

 Autonomy: Once deployed, Smart Contracts execute automatically without the need for intermediaries.
 Transparency: The contract’s code and transactions are visible on the blockchain, ensuring transparency.
 Immutability: Once deployed, the contract cannot be changed, ensuring that the agreement is fixed.
 Security: Blockchain’s encryption ensures the contract is tamper-proof and secure from fraud.
 Efficiency: Smart Contracts reduce transaction time and costs by eliminating the need for third parties.

Difference from Traditional Contracts:

 Traditional contracts are paper-based and require human intervention and intermediaries (e.g., lawyers, notaries).
 Smart Contracts are code-based and self-executing, meaning they automatically enforce the terms without requiring
intermediaries.

5. Explain the concept of the Ethereum Blockchain. How has Ethereum become the most prevalent
blockchain for Smart Contract development? Discuss the advantages Ethereum offers for Smart
Contracts. (10 marks)

Answer: Ethereum Blockchain is a decentralized platform that allows developers to create and deploy
Smart Contracts and decentralized applications (DApps). Ethereum introduced the concept of a Turing-
complete blockchain, meaning it can execute any computational task through Smart Contracts, unlike
Bitcoin, which is more limited to simple transactions.

Ethereum's Prevalence in Smart Contract Development: Ethereum’s blockchain is the most widely used
platform for Smart Contract development due to its flexibility, scalability, and the extensive support for
Smart Contracts. It uses Solidity, a contract-oriented programming language, allowing developers to create
complex contracts.

Advantages of Ethereum for Smart Contracts:

 Flexibility and Turing Completeness: Ethereum allows for the creation of any type of Smart Contract, from simple
payments to complex decentralized finance (DeFi) applications.
 Decentralized and Secure: Ethereum’s decentralized nature ensures that Smart Contracts are secure and tamper-
resistant, offering a trustless environment.
  Large Developer Community: Ethereum has a vibrant ecosystem of developers, tools, and resources, which fosters
innovation and adoption.
 Scalability Solutions: Ethereum is working on improvements like Ethereum 2.0 to enhance scalability, lower transaction
costs, and improve energy efficiency.

6. Discuss the Ethereum Virtual Machine (EVM). How does it function, and what role does it play in
executing Ethereum Smart Contracts? (10 marks)

Answer: The Ethereum Virtual Machine (EVM) is the runtime environment responsible for executing
Smart Contracts on the Ethereum network. It is a decentralized virtual machine that operates across all
Ethereum nodes to ensure that the execution of Smart Contracts is consistent, secure, and verifiable.

Functioning of EVM:

 Code Execution: The EVM executes bytecode, which is compiled from higher-level languages such as Solidity. This
bytecode runs on every Ethereum node, ensuring that the contract’s logic is processed in the same way across the
network.
 Deterministic Environment: The EVM ensures that the execution of contracts results in the same output for every node,
promoting consensus and ensuring the integrity of the Ethereum network.
 Gas Calculation: Every action executed by the EVM consumes "gas" (a unit of computational work), which requires
users to pay a fee in Ether. The gas system prevents excessive computation and ensures that the network is not
overloaded with infinite loops or overly complex processes.

Role in Executing Smart Contracts:

 The EVM is essential for executing Ethereum Smart Contracts, as it enforces the logic and conditions of these contracts
once they are deployed on the blockchain. When a contract is called, the EVM processes the transaction and executes
the contract code, ensuring that the desired outcomes occur automatically, without the need for intermediaries.

7. Provide examples of real-world applications where Ethereum Smart Contracts have been
successfully implemented. Discuss the practical benefits and challenges associated with these
implementations. (10 marks)

Answer: Real-World Applications:

Decentralized Finance (DeFi):

o Example: Platforms like Uniswap and Compound leverage Ethereum Smart Contracts for decentralized
exchanges, lending, and borrowing services without relying on traditional financial institutions.
o Benefits: DeFi eliminates intermediaries, reduces transaction costs, and increases financial inclusion. It allows
for greater transparency and access to financial products globally.
o Challenges: Smart contract bugs, security vulnerabilities, and the risk of impermanent loss in liquidity pools.

Supply Chain Management:

o Example: Provenance uses Ethereum Smart Contracts to track the origin and movement of goods in the supply
chain, providing transparency and verifying the authenticity of products.
o Benefits: It increases transparency, reduces fraud, and enhances trust between parties.
o Challenges: Integration with existing legacy systems, scalability issues, and ensuring data accuracy.

Insurance:

o Example: Etherisc utilizes Ethereum Smart Contracts for parametric insurance, where claims are paid
automatically based on real-world data (e.g., weather reports).
 o Benefits: Automation reduces administrative costs and fraud, improving efficiency.
o Challenges: Ensuring reliable data or "oracles" for triggering the contracts and legal recognition of automated
payouts.

Practical Benefits:

 Automation of business processes.

 Increased transparency and reduced reliance on intermediaries.
 Enhanced security through immutability of blockchain.

Challenges:

 Technical risks like bugs and vulnerabilities in Smart Contract code.

 Gas fees for executing contracts, especially during network congestion.
 Legal and regulatory challenges in adopting Smart Contracts for traditional business processes.

8. What are the key differences between Ethereum Smart Contracts and those on other blockchains
like Bitcoin? How does the flexibility of Ethereum impact its use for Smart Contracts? (10 marks)

Answer: Key Differences between Ethereum and Bitcoin Smart Contracts:

Purpose:

o Bitcoin: Bitcoin’s primary purpose is a peer-to-peer cryptocurrency. Bitcoin’s scripting language (Bitcoin Script)
is intentionally limited and not Turing-complete, meaning it can only handle simple operations like transaction
validation.
o Ethereum: Ethereum is designed specifically to support Smart Contracts and decentralized applications
(DApps). Its programming language, Solidity, is Turing-complete, which allows for much more complex and
customizable logic in Smart Contracts.

Smart Contract Execution:

o Bitcoin: Bitcoin Smart Contracts (using Bitcoin Script) are limited and not designed for complex execution.
They support basic operations like multi-signature wallets but are not suitable for DApps.
o Ethereum: Ethereum Smart Contracts allow for much more complex interactions, including financial services,
governance, and data storage. Ethereum’s EVM enables full programmability and deterministic execution of
Smart Contracts.

Flexibility:

o Bitcoin: Bitcoin Script is intentionally not flexible and has limited functionalities for Smart Contracts, focusing
mainly on security and simplicity.
o Ethereum: Ethereum’s flexibility comes from its Turing-complete language (Solidity), enabling developers to
create complex, decentralized applications and Smart Contracts that can interact with each other, make
decisions, and handle external data.

Impact of Flexibility: Ethereum’s flexibility allows developers to create a broad range of applications, such
as decentralized finance (DeFi), decentralized exchanges (DEXs), games, supply chain tracking, and more.
This adaptability has made Ethereum the leading platform for Smart Contract development, fostering a rich
ecosystem of DApps and innovations.
9. How does the Ethereum Virtual Machine ensure security and prevent malicious code in Smart
Contracts? Discuss the security mechanisms in place and the importance of gas in the execution of
Ethereum Smart Contracts. (10 marks)

Answer: Security in the Ethereum Virtual Machine (EVM):

1. Code Auditing: The EVM enforces deterministic execution, which ensures that Smart Contracts behave the same way
on all nodes. However, security primarily relies on developers’ ability to write bug-free, secure code. Tools like MythX
and Slither help with auditing and vulnerability detection.
2. Gas and Transaction Fees: Every action in the EVM consumes gas, which is paid in Ether. Gas limits prevent infinite
loops and excessive resource consumption by malicious contracts, ensuring that smart contract execution remains cost-
effective and within limits.
3. Gas Limits and Denial of Service (DoS): By setting gas limits for each transaction, Ethereum prevents smart contracts
from running indefinitely or consuming too much computing power. This mechanism helps mitigate DoS attacks and
malicious code that might attempt to overload the network.
4. Consensus Mechanism (Proof of Stake/Proof of Work): Ethereum's consensus mechanisms ensure that only valid
transactions are added to the blockchain. Malicious actions or invalid code are not included in the final state of the
blockchain.

Security Mechanisms:

 Reentrancy Guards: Used to prevent attacks like the DAO hack where a contract calls back into itself in an unexpected
way, allowing for repeated withdrawals.
 Time-locks: Contracts can be coded with time constraints to prevent immediate execution, mitigating attacks on timing
vulnerabilities.
 Formal Verification: Ethereum encourages the formal verification of code logic, providing mathematical proofs to
ensure the contract performs as intended.

Importance of Gas: Gas ensures that users pay for the computational resources required to execute Smart
Contracts, discouraging malicious behavior such as spam attacks. It serves as a cost mechanism for the
Ethereum network, ensuring that the network remains secure and efficient by preventing wasteful or
malicious execution of contract code.

10. Describe the development lifecycle of an Ethereum Smart Contract, from coding to deployment.
What are the tools and platforms used for creating and deploying Ethereum Smart Contracts? (10
marks)

Answer: Development Lifecycle of an Ethereum Smart Contract:

Coding:

o Writing the Contract: The first step in developing a Smart Contract is writing the code using languages like
Solidity or Vyper. These are high-level programming languages designed for creating Smart Contracts on
Ethereum.
o Testing the Contract: Developers write unit tests and perform simulations using frameworks like Truffle or
Hardhat to ensure the contract behaves as expected. These tests help detect logical flaws or vulnerabilities
before deployment.

Compiling:

o Compilation: The Smart Contract code is compiled into bytecode, which is the code that will be executed by
the Ethereum Virtual Machine (EVM). This step is done using the Solidity compiler or other relevant tools.
 Deploying:

o Deploying the Contract: The compiled contract is deployed to the Ethereum blockchain using a deployment
tool such as Truffle, Hardhat, or Remix IDE. The contract is sent to the Ethereum network with an associated
transaction fee (gas).
o Deployment Process: The deployment process includes creating a transaction that will broadcast the contract
to the network. Once the contract is confirmed, it is recorded on the Ethereum blockchain.

Interacting:

o Interfacing with the Contract: After deployment, users or other contracts can interact with the deployed
contract. Platforms like web3.js and ethers.js are used to connect the front end of applications with the
Ethereum blockchain to execute functions in Smart Contracts.
o Frontend Integration: Decentralized applications (DApps) are created to interact with Smart Contracts using
React.js, Vue.js, or Angular integrated with Ethereum libraries like web3.js.

Tools and Platforms for Creation and Deployment:

 Solidity: Primary programming language for Ethereum Smart Contracts.

 Truffle Suite: A popular development framework for writing, testing, and deploying Smart Contracts.
 Hardhat: A development environment and framework that helps in deploying and debugging Smart Contracts.
 Remix IDE: A web-based integrated development environment for writing, testing, and deploying Solidity Smart
Contracts.
 MetaMask: A browser extension used for managing Ethereum wallets and interacting with DApps.