State variables in blockchain smart contracts are special variables that store data permanently on the blockchain. When a contract is deployed, these variables are created in the blockchain's storage with default values. Functions in the contract can read or update these state variables. Unlike local variables, state variables keep their values between function calls, so changes persist on the blockchain. For example, a 'count' variable can be incremented by calling a function, and its updated value remains stored for future calls. This behavior is shown step-by-step in the execution table, where 'count' starts at 0, increments to 1, then 2, and can be read anytime. This persistence is key to tracking contract state like balances or counters.