Unlike a traditional contract, smart contracts help you exchange assets (money, property, shares, etc) or anything of value without the need of an intermediary, such as a notary or solicitor.
Rather than existing on paper, a smart contract has its terms written into lines of code on a blockchain. What this means is the terms are visible to all parties and cannot be altered without the knowledge of all involved. This also allows outside parties to observe while protecting the identities of those involved.
The most common example used to explain smart contracts is to look at them as vending machines: you drop your cryptocurrency into the ‘vending machine’ (i.e. ledger), and whatever you are purchasing drops into your account. No more need for a middleman to facilitate or enforce the contract.
Better yet, a smart contract is able to monitor whether any of the terms have not been met (such as an expiry date) and will automatically nullify the contract, returning any assets involved to their original owners.
The appeal of smart contracts is far reaching as they have the ability to simplify lengthy and complex transactions, reduce costs incurred from involving a third party, and removes the possibility of human error or interference.
Smart contracts were first proposed back in 1994 – 15 years before the release of Bitcoin and the first blockchain – by Nick Szabo, a cryptographer and legal scholar. Fun fact: though Szabo denies it, some speculate him to also be Satoshi Nakamoto, the inventor of Bitcoin.