What is Smart Contract? Things to know about Smart Contract

The shift of the global economy to the digital space requires not only new payment methods but also a revolution in the way commitments are established and enforced. Smart Contracts, a term that once existed only in cryptographic forums in the 1990s, have become a pillar of the modern blockchain revolution. According to in-depth analysis from Tan Phat Digital, these are not simply lines of computer code; they represent a profound change in trading philosophy: replacing trust in people and institutions with absolute trust in mathematics and protocols. This analysis takes a comprehensive look at the developments, technical architecture, security risks, and legal landscape that are shaping the future of self-executing agreements on a global scale.

Philosophical Origins and Historical Evolution

The concept of smart contracts did not originate with the blockchain boom of 2009 but was actually sparked more than a decade earlier. Computer scientist, lawyer, and cryptographer Nick Szabo was the first to coin the term in 1994. With a unique background combining computer science from the University of Washington and law from George Washington University Law School, Szabo saw the inherent limitations of the traditional legal system: high transaction costs, reliance on intermediaries, and the ambiguity of natural language.

His vision Szabo on smart contracts as "a computerized transaction protocol that implements the terms of a contract". He hopes to use computer algorithms to mimic and improve current legal systems, turning agreement terms into lines of code that can self-control and execute without human intervention. To help the public visualize, Szabo used the classic metaphor of a vending machine. A vending machine is a primitive example of a smart contract: it stores rigid rules (if enough money is given and a valid product is selected, the machine will release the goods). This process does not require buyers and sellers to trust each other; they just need to trust the machine's operating mechanism.

However, throughout the 1990s, Szabo's idea remained at a theoretical level due to the lack of a "decentralized" and "tamper-proof" digital infrastructure. It was not until Bitcoin appeared in 2008 at the hands of Satoshi Nakamoto that the final piece of the puzzle, blockchain technology, was truly complete. Although Bitcoin has realized code-based trust, its Script language is intentionally limited in features to ensure maximum security, making it not flexible enough to build complex contracts.

The birth of Ethereum in 2015, proposed by Vitalik Buterin, truly made Szabo's vision a reality on a large scale. Ethereum introduces a generalized blockchain with the Ethereum Virtual Machine (EVM) that allows the execution of "Turing-complete" code, meaning that any computational logic can be programmed and run on the network. From here, smart contracts have evolved from an abstract concept into a powerful practical tool, leading waves of innovation from ICO (2017), DeFi (2018-present) to NFT and DAO.

Technical Operating Mechanism and Implementation Process

In essence, a smart contract is a software program running on the blockchain platform, operating according to "If... So...". When predetermined conditions are met and verified by the network of nodes in the system, the code will automatically perform corresponding actions such as transferring funds, registering property ownership or releasing data.

The lifecycle process of a smart contract usually includes six strict stages:

• Terms agreement: The parties agree on the rules, triggering conditions and desired outcomes to establish a logical foundation for the contract.

• Conversion to code: Legal terms are translated into a programming language (like Solidity or Rust) to turn the agreement into a format that computers can understand.

• Deployment to Blockchain: Code is sent to the network as a special transaction, written to the block to enable "liveness" and "immutability".

• Condition monitoring: The contract is on standby, continuously checking data sources (on-chain or via Oracle) to ensure immediate response to real events.

• Automatic execution: When the condition is met, the code automatically runs the specified functions without anyone's permission, eliminating the risk of human intervention people.

• Recording results: Every state change and transaction history is permanently recorded on the blockchain, creating irrefutable evidence.

The biggest difference between smart contracts and traditional software lies in "determinism" and "dispersion". Determinism ensures that given the same input, the contract will always produce a unique result. Decentralization means that contract code is copied and stored on every node of the network, making a lone attack impossible.

Architectural Analysis of Key Smart Contract Platforms

By 2025, the race between blockchain platforms will no longer be just about transaction speed but also about virtual machine architecture and data models. Here are the characteristics of the three leading ecosystems:

• Ethereum (EVM):

  • Data model: Account-based.

  • Consensus mechanism: Proof of Stake (PoS).

  • Main language: Solidity, Vyper.

  • Scalability: File Focus on Layer 2 solutions (Rollups).

  • Number of Validators: More than 1,000,000 (Very high level of decentralization).

• Solana (Sealevel):

  • Data model: Account-based but allows parallel execution.

  • Consensus mechanism: Incorporates Proof of History (PoH) and PoS.

  • Main language: Rust, C, C++.

  • Scalability: Parallelization optimization right at Layer 1.

  • Number of Validators: About more than 2,000 (Average level).

• Cardano (Plutus):

  • Data model: eUTXO (Extended from Bitcoin model).

  • Consensus mechanism: Ouroboros PoS.

  • Main language: Plutus (based on Haskell).

  • Scalability: Separation of payment layer and computation layer.

  • Amount Validator: About more than 3,000 (Good level).

This diversity gives businesses many options depending on their needs for security, liquidity or real-time processing speed.

Programming Language: The Bridge Between Idea and Execution

The programming language determines the types of security vulnerabilities that the system can face face:

1. Solidity: The most popular language, in the style of JavaScript and C++. However, it is often criticized for its "flexibility" that can easily lead to logic errors if not tightly controlled.

2. Rust: Used on Solana and Near, Rust is a bastion of security thanks to its strict memory management mechanism, eliminating the majority of data leaks right from the compilation step.

3. Move: Emerging from Meta's project, Move treats assets as a "resource" that cannot be arbitrarily copied, helping to prevent logic errors from disappearing assets.

4. Plutus: Based on the academic functional thinking of Haskell, allows the use of "Formal Validation" to mathematically prove the correctness of source code before deployment.

Analyzing Security Risks and Shocking Hacks

Even designed to enhance security, smart contracts remain a top target for hackers. Common vulnerabilities include Reentrancy attacks, Arithmetic Errors, and Oracle manipulation.

Below is a summary of typical attacks and lessons learned:

• Ronin Bridge (2022): $624 million in damage. The cause is due to compromise of 5/9 authentication nodes through phishing. Lesson: Need to decentralize key management (multisig).

• Poly Network (2021): $611 million in damage. The cause is an access control vulnerability in cross-chain messages. Lesson: Strictly manage the powers of administrative functions.

• Nomad Bridge (2022): Damage of 190 million USD. The cause is a configuration error when upgrading the system. Lesson: Carefully check parameters when updating contracts.

• Mango Markets (2022): Loss of 114 million USD. The cause is Oracle's price manipulation through flash loans. Lesson: Don't rely on price data from a single source.

Account Abstraction (ERC-4337)

The most important advance in terms of user experience in 2025 is the ubiquity of ERC-4337. This technology turns the user wallet into a smart contract, providing the following features:

• Social Recovery: Allows wallet recovery via friends or trusted devices without the need for a seed phrase.

• Gasless Transactions: Developers can sponsor gas fees or allow payment in other tokens such as USDC.

• Biometric security study: Use fingerprint or FaceID to sign transactions directly, blurring the line between Web2 and Web3.

Legal Situation in Vietnam and Internationally

In the US and EU, legal frameworks such as MiCA or GENIUS Act have begun to shape the way digital assets are managed. In Vietnam, the introduction of the Electronic Transactions Law in 2023 is an important milestone, initially recognizing smart contracts as a form of electronic contracts. However, by the end of 2025, Vietnam still has no specialized guidance documents on civil liability when contract codes encounter errors. Experts note that smart contracts must still meet all elements of the Civil Code to be protected by law.

Things to Note

Smart contracts have transformed into an essential business management tool. For organizations considering adoption, Tan Phat Digital recommends three central pillars:

1. Security is the number one priority: All source code must be independently audited.

2. Design flexibility: Required emergency stop or upgrade mechanism when necessary.

3. Legal harmonization: Always prepare parallel agreements in natural language to handle off-chain disputes.

The ability to program trust will become one of the most important skills of the 21st century, contributing to building a more transparent and efficient economy.