smart contracts: Blockchain automated digital protocol

Why You Need to Understand Smart Contracts

Traditional contract execution often requires third-party witnesses and enforcers—banks, lawyers, and trading platforms all play such roles. But in the blockchain world, smart contracts have changed the rules of the game. This automatically executed digital protocol allows two parties to interact directly, without the involvement of intermediaries.

Imagine the scenario of purchasing digital artwork: usually, you need to go through galleries, brokers, or platforms to complete the transaction. But with smart contracts, the entire process of the buyer transferring funds and the seller delivering the artwork can be encoded and automatically verified — this is the core value of smart contracts.

What are smart contracts

Smart contracts are essentially a piece of program code stored on the blockchain. They preset a series of “if…then…” logical conditions. Once the conditions are met, the smart contract automatically executes the corresponding transaction or operation without the need for human intervention.

These contracts run on public chains such as Ethereum and BNB Smart Chain, ensuring transparency and immutability of transactions. Since the code is executed directly on a distributed network without a single auditing authority, this greatly reduces trust costs and transaction risks.

The biggest advantage of smart contracts is that they eliminate the reliance on intermediaries. Whether it is payment settlement, loan issuance, or asset transfer, all processes are driven by coded rules rather than by human decision-making.

The Operation Process of Smart Contracts

To understand how smart contracts work, it is necessary to comprehend the following six key steps:

Step 1: Write and Deploy Developers use specific programming languages to write smart contracts code. Ethereum uses Solidity, while Solana adopts Rust. Once completed, the contract is deployed to the blockchain network, becoming a permanent part of that network.

Step 2: Rules in the Code Smart contracts encompass all the rules and conditions for transactions. These rules can be simple, such as a single payment transfer, or they can be extremely complex, involving multiple participants and the validation of multiple data sources.

Step 3: User Activation Any user with access to the blockchain can trigger the execution of smart contracts. When users interact with DeFi platforms through wallets like MetaMask or Phantom, they are essentially calling the backend smart contract code.

Step Four: Network Verification Once activated, the nodes of the blockchain network will verify whether the transaction meets all the conditions outlined in the smart contracts. Only when all conditions are satisfied will the transaction be executed.

Step 5: Record on-chain After verification, the transaction information is permanently written into the distributed ledger of the blockchain. This record contains all relevant details, is publicly transparent, and cannot be tampered with.

Step 6: Final Confirmation The execution result of smart contracts is irreversible. Once written to the blockchain, there is no mechanism to revoke or modify this transaction. This guarantees the integrity and security of the transaction.

The Practical Applications of Smart Contracts

Smart contracts are far more than just simple payment transfers. They have become the infrastructure for multiple fields within the blockchain ecosystem:

Cryptographic Financial Transactions From stablecoin transfers to complex derivatives trading, smart contracts automate the flow and settlement process of all crypto assets.

DeFi and DApp platforms This is the richest application scenario for smart contracts. Lending protocols, decentralized exchanges, liquidity mining, etc., are all driven by smart contracts. NFT platforms use smart contracts to create, verify, and trade unique digital assets.

Insurance Automation Smart contracts can automatically trigger the payment process when the claim conditions are met, without the need for traditional insurance company review. This significantly speeds up the claims process and reduces operational costs.

Supply Chain Tracking From the origin to the final consumer, smart contracts can track every step of the flow of goods, record changes in ownership rights, and prevent counterfeiting and fraud.

Intellectual Property Management Music, literature, and artworks can achieve copyright management and automatic royalty distribution through smart contracts. Creators do not need to rely on publishers or agencies.

Voting System Smart contracts can create transparent and tamper-proof voting mechanisms, ensuring that every vote is accurately counted and cannot be altered.

Comparison of Mainstream Smart Contract Platforms

Different blockchain platforms offer unique smart contracts environments:

Ethereum (ETH) The birthplace of smart contracts. Although it has the most mature ecosystem and the most developers, transaction fees remain a pain point for users — during network congestion, fees can rise significantly.

BNB Smart Chain (BSC) The programming language is compatible with Ethereum, reducing the migration costs for developers. The biggest advantage is that transaction fees are cheaper, attracting a large number of cost-sensitive projects.

Solana (SOL) Known for its high throughput and low fees. Its unique Proof of History consensus mechanism allows it to handle more concurrent transactions, making it the choice for developers pursuing performance.

Cardano (ADA) Adopted a more rigorous, research-driven development approach, with a particular emphasis on code security and long-term sustainability.

Polkadot (DOT) Its main feature is cross-chain interoperability. Different blockchains can connect through Polkadot's relay chain to share data and value with each other.

Real Challenges Facing Smart Contracts

Despite the bright prospects, smart contracts still have several issues that need to be addressed:

External Data Dependency Smart contracts need to obtain information from outside the chain—this requires what is known as an “oracle”. However, oracles themselves can become weak links; they may be manipulated, delayed, or error-prone, which can affect the accurate execution of the contract.

Code Vulnerability Risk Even the most sophisticated programs can have bugs. Once smart contracts are deployed, they cannot be modified, so any code defects can be exploited by attackers, leading to financial losses. This is also why large projects undergo multiple rounds of testing and auditing before going live.

Network Congestion and Performance Bottlenecks When there is a surge in users, the processing capacity of the blockchain network becomes inadequate. This can lead to transaction delays and even prevent some smart contracts from being executed in a timely manner.

Irreversible execution result The immutability of smart contracts is a double-edged sword. While it ensures security, there is no “undo” button once an error occurs during execution. Users can only accept the outcome or remedy it through a new contract.

How the industry is responding to these challenges

Bug Bounty Program Many blockchain projects have established bounty programs to incentivize white hat hackers and developers to actively discover and report vulnerabilities. This can help identify issues in a timely manner before malicious attacks occur.

Professional Security Audit Third-party security companies conduct in-depth code audits of smart contracts, using a variety of methods including automated tools and manual analysis to detect potential issues.

Development Standards and Frameworks The industry is promoting ERC standards (Ethereum Improvement Proposals) and other specifications to ensure that smart contracts adhere to a unified interface specification, improving interoperability and development efficiency.

Layer 2 scaling solutions Optimistic rollups and ZK rollups technologies move transaction processing off-chain, significantly increasing throughput while reducing costs. These solutions alleviate pressure on the mainnet while maintaining security.

Smart Contracts on Bitcoin: Special Cases

The programming language Script of Bitcoin, while supporting basic smart contracts functionality, has relatively limited capabilities. It is mainly used to set the spending rules for BTC and is not suitable for building complex application logic.

However, Bitcoin can also achieve stronger smart contracts capabilities through Layer 2 solutions. The Lightning Network provides high-speed micropayment channels, while sidechains like Rootstock (RSK) add full smart contracts functionality to Bitcoin.

It is worth mentioning that Bitcoin's NFTs and Ordinals do not rely on smart contracts. They record data directly on Bitcoin UTXOs, using a completely different technological solution.

Future Prospects of Smart Contracts

Smart contracts have evolved from theoretical concepts to everyday applications. They are transforming the way multiple industries such as finance, insurance, and supply chains operate, eliminating unnecessary intermediaries and improving transaction efficiency.

Although there is still room for improvement in technology—security, performance, cross-chain compatibility, etc., are continuously iterating—the fundamental value proposition of smart contracts has been fully validated. With the improvement of infrastructure and the maturity of the developer ecosystem, we have reason to believe that smart contracts will become the core driving force of the digital economy.