What is a smart contract: A complete guide to self-executing agreements on blockchain

The fundamentals you need to know

Smart contracts are essentially code programs that reside on blockchains like Ethereum and BNB Smart Chain, executing automatically without the need for intermediaries. These digital agreements ensure transparency, reduce reliance on third parties, and significantly improve operational efficiency. By simplifying complex transactions, they represent a transformative tool for multiple industrial sectors.

Understanding what a smart contract is

A smart contract that is fundamentally a code program that self-executes on a blockchain network, operating without central supervision. These automated agreements leverage the inherent security of blockchain technology to ensure compliance without the need for human overseers.

Imagine a digital art transaction. Conventionally, a gallery would act as an intermediary, verifying identities and ensuring transfers. With smart contracts, this process is radically simplified: the code implements “if-then” conditional logic. When the buyer sends the agreed funds, the contract instantly executes the transfer of the digital asset from the seller to the buyer. This mechanism eliminates friction, reduces costs, and speeds up completion.

How they operate: the technical functioning

The execution process is divided into clear stages:

Initial development and implementation

Developers write smart contracts using specialized languages: Solidity for Ethereum, Rust for Solana. The code is deployed on the blockchain network, integrating into its decentralized ecosystem permanently.

Definition of rules and conditions

The contract contains instructions that establish specific terms, requirements, and parameters. These can be as simple as a one-time payment or as elaborate as multi-phase processes involving numerous participants and data validations.

Invocation and execution

Any user with access to the blockchain can activate the contract by interacting with its specific functions. When users access DeFi platforms or dApps through wallets like MetaMask or Phantom, their transactions are processed through smart contracts operating behind the scenes.

Network Validation

When the contract is invoked, the blockchain network verifies and validates the transaction. If all predefined conditions are met, the execution is carried out automatically without additional intervention.

Permanent and immutable record

Once confirmed, the transaction is recorded as an indelible entry in the decentralized ledger. This record includes all relevant details, providing total transparency and complete auditability.

Irrevocable purpose

The execution of a smart contract is final and irreversible. By being stored on a decentralized and tamper-proof database, integrity and security are guaranteed, minimizing risks of fraud or unauthorized manipulation.

Practical Applications in the Real World

Automated financial operations

Smart contracts enable the transfer of digital assets, payment processing, and execution of sophisticated financial agreements directly between participants. They eliminate traditional intermediaries, speeding up settlement and reducing operational costs.

Decentralized application ecosystem

dApps are fundamentally built on smart contracts. DeFi platforms provide automated lending and trading services. Blockchain games integrate non-fungible tokens as collectible digital resources. NFT platforms allow for the creation, transfer, and commercialization of unique tokenized assets, leveraging the programmability and security of blockchain networks.

Digitization of the insurance sector

Smart contracts automate claims processing, verify beneficiary eligibility, and release payments based on predetermined conditions. This reduces documentation, improves operational response, and increases transparency in insurance transactions.

Traceability in supply chains

Smart contracts track the movement of goods, verify authenticity, and ensure complete traceability. They automate order fulfillment, payment settlement, and quality control, reducing fraud and improving efficiency.

Intellectual Property Rights Management

Through NFTs, smart contracts manage the distribution of creative works: music, art, written content. They allow creators to define licensing terms, automate royalty payments, and ensure fair distribution of assets.

Transparent voting systems

Smart contracts facilitate secure voting by ensuring vote integrity, preventing fraud, and allowing for instant recounts. This strengthens trust in democratic processes through verifiable technology.

Major platforms that support smart contracts

Ethereum (ETH): Pioneer and undisputed leader of the space, it has the largest developer community. Although its transaction fees are high, its maturity and robust ecosystem keep it dominant.

BNB Smart Chain (BSC): Its programming language mimics that of Ethereum, making project migration between platforms easier. It offers considerably lower fees, attracting cost-sensitive developers.

Solana (SOL): Stands out for extraordinary transaction speed and minimal fees, positioning itself among the most adopted smart contract platforms.

Cardano (ADA): Takes a rigorous academic review approach, emphasizing security and sustainability in protocol development.

Polkadot (DOT): Specialized in interoperability, it enables connection between different blockchains, facilitating communication and information exchange between networks.

Disadvantages and Critical Limitations

Dependence on oracles and external sources

Smart contracts require information from the physical world through oracles. Although the contract itself is immune to manipulation, oracles can introduce vulnerabilities: centralizing information, being susceptible to attacks, or experiencing disruptions.

Security risks in code

Like any software, the code of smart contracts can contain exploitable errors. Design or implementation vulnerabilities pose serious financial risks. For this reason, rigorous audits prior to deployment are critical.

Scalability and performance limitations

As blockchain networks grow, issues of congestion and speed emerge. Under high demand, the execution of smart contracts can slow down, affecting user experience.

The paradox of immutability

Although irreversibility ensures security, it also creates problematic rigidity. Code errors or circumstantial changes cannot be easily corrected once the contract has been deployed.

Mechanisms to Mitigate These Risks

Vulnerability Identification Rewards

Platforms run programs offering substantial rewards to researchers, ethical hackers, and developers who identify vulnerabilities before exploitation. This encourages responsible disclosure and strengthens collective security.

Professional auditing services

Specialized companies conduct thorough security reviews, identifying and remediating vulnerabilities. They apply rigorous testing, code analysis, and formal verification techniques.

Standardization of protocols and frameworks

The developer community works on creating interfaces, protocols, and common formats. Standards such as ERC (Ethereum Request for Comments) establish widely accepted interfaces, improving interoperability between blockchain platforms.

Additional scaling solutions

Optimistic rollups and ZK-rollups operate as secondary layers on blockchains like Ethereum, processing transactions off the main network. This reduces congestion, lowers costs, and increases processing capacity.

Can Bitcoin support smart contracts?

Bitcoin's Script programming language allows for simple smart contracts, but its capabilities are significantly limited compared to specialized platforms like Ethereum. Script allows for setting rules to spend BTC, but it does not support complex smart contract functionalities.

Bitcoin can integrate advanced smart contracts through additional layer protocols and parallel chains built on its network, such as the Lightning Network, enabling faster and more economical transactions. Parallel chain platforms like Rootstock facilitate sophisticated functionalities on the Bitcoin network.

Bitcoin Ordinals and NFTs work differently: they do not use smart contracts. Instead, files are inscribed directly onto individual satoshis, which are then integrated into blocks of the Bitcoin blockchain.

Final Reflection

Smart contracts represent a fundamental evolution in how we establish digital agreements. By automating contract enforcement and eliminating intermediaries, they offer unprecedented transparency, security, and efficiency. The potential to transform operations in digital finance, insurance, supply chains, and governance is considerable.

However, real challenges persist: code vulnerabilities, scalability limitations, and inherent rigidity. The crypto community is actively responding with audits, improved standards, additional layer solutions, and security programs. As these technologies mature, smart contracts are likely to expand the boundaries of what is possible in the digital economy and beyond.